ACCOUNTING 27TH EDITION BY CARL WARREN, JAMES M REEVE, JONATHAN DUCHAC TEST BANK by QuentinAxel

TEST BANK Accounting 27th Edition by Carl Warren, James M. Reeve, Jonathan Duchac

TABLE OF CONTENTS: Chapter 1 - Introduction to Accounting and Business Chapter 2 - Analyzing Transactions Chapter 3 - The Adjusting Process Chapter 4 - Completing the Accounting Cycle Chapter 5 - Accounting Systems Chapter 6 - Accounting for Merchandising Businesses Chapter 7 – Inventories Chapter 8 - Internal Control and Cash Chapter 9 – Receivables Chapter 10 - Long-Term Assets: Fixed and Intangible Chapter 11 - Current Liabilities and Payroll Chapter 12 - Accounting for Partnerships and Limited Liability Companies Chapter 14 - Long-Term Liabilities: Bonds and Notes Chapter 15 - Investments and Fair Value Accounting Chapter 16 - Statement of Cash Flows Chapter 17 - Financial Statement Analysis

Chapter 18 - Introduction to Managerial Accounting Chapter 19 - Job Order Costing Chapter 20 - Process Cost Systems Chapter 21 - Cost-Volume-Profit Analysis Chapter 22 – Budgeting Chapter 23 - Evaluating Variances from Standard Costs Chapter 24 - Decentralized Operations Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Chapter 26 - Capital Investment Analysis

Chapter 1 - Introduction to Accounting and Business True / False 1. A merchandising business buys products from other businesses to sell to customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/7/2017 11:04 AM 2. The role of accounting is to provide many different users with financial information to make economic decisions. a. True b. False ANSWER: POINTS: DIFFICULTY: QUESTION TYPE:

True 1 Moderate Bloom's: Remembering True / False

HAS VARIABLES: LEARNING OBJECTIVES:

False ACCT.WARD.18.01-01 - 01-01

ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

Chapter 1 - Introduction to Accounting and Business 3. Accounting information users need reports about the economic activities and condition of businesses. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 4. Managerial accounting information is used by external and internal users equally. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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5. Senior executives cannot be criminally prosecuted for the wrongdoings they commit on behalf of the companies where they work. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:32 AM 6. Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to the management. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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7. Proper ethical conduct implies that you only consider what's in your best interest. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 8. Some of the major fraudulent acts committed by senior executives started as what they considered to be small ethical lapses that grew out of control. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:36 AM

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9. A business is an organization in which basic resources or inputs, such as materials and labor, are assembled and processed to provide outputs in the form of goods or services to customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.BB.06 - Resource Management BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:45 PM 10. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information. a. True b. False ANSWER: POINTS: DIFFICULTY:

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11. Financial accounting reports are relevant only to users within the business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 4:31 PM 12. The Sarbanes-Oxley Act established standards for corporate responsibility and disclosure. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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13. The main objective for all business is to maximize unrealized profits. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 14. The primary role of accounting is to determine the amount of taxes a business will be required to pay to taxing entities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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15. The basic difference between manufacturing and merchandising companies is the completion level of the products they purchase for resale to customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 16. Proprietorships are owned by one owner and provide only services to their customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

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17. About 90% of the businesses in the United States are organized as corporations. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 18. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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19. The cost concept is the basis for entering the purchase price into the accounting records. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 20. The unit of measurement concept requires that economic data be recorded in dollars. a. True b. False ANSWER: POINTS: DIFFICULTY:

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21. If a building is appraised for $85,000, it is offered for sale at $90,000, and the buyer pays $80,000 cash for it, the buyer would record the building at $85,000. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:45 AM 22. The financial statements of a proprietorship should include the owner's personal assets and liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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23. No significant differences exist between the accounting standards issued by the FASB and the IASB. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 24. Generally accepted accounting principles regulate how and what financial information is reported by businesses. a. True b. False ANSWER: POINTS: DIFFICULTY:

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25. The accounting equation can be expressed as Assets – Liabilities = Owner's Equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 26. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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27. The owner’s rights to the assets rank ahead of the creditors' rights to the assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 28. If the liabilities owed by a business total $300,000 and owner's equity is equal to $300,000, then the assets also total $300,000. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Assets = Liabilities + Owner's Equity = $300,000 + $300,000 = $600,000 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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29. If total assets decreased by $30,000 during a specific period and owner's equity decreased by $35,000 during the same period, the period's change in total liabilities was a $65,000 increase. a. True b. False ANSWER: RATIONALE:

False Assets = Liabilities + Owner's Equity –$30,000 = Liabilities + (–$35,000) Liabilities = +$5,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 30. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the same period, the period's change in total owner's equity was a $200,000 increase. a. True b. False ANSWER: RATIONALE:

True Assets = Liabilities + Owner’s Equity +$190,000 = –$10,000 + Owner’s Equity Owner’s Equity = +$200,000

POINTS: DIFFICULTY:

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31. If net income for a proprietorship was $50,000, the owner withdrew $20,000 in cash, and the owner invested $10,000 in cash, the capital of the owner increased by $40,000. a. True b. False ANSWER: RATIONALE:

True Increase in Capital = Net Income for the Year – Withdrawals + Additional Investment by Owner = $50,000 – $20,000 + $10,000 = $40,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 32. An account receivable is typically classified as a revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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33. An account receivable is a claim against a customer resulting from a sale on account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 34. Paying an account payable increases liabilities and decreases assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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35. Receiving payments on an account receivable increases both equity and assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 36. Cash withdrawals by owners decrease assets and increase equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

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37. Purchasing supplies on account increases liabilities and decreases equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 38. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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39. Revenue is earned only when money is received. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 40. Assets that are used up during the process of earning revenue are called expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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41. The excess of revenue over the expenses incurred in earning the revenue is called capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 42. The primary financial statements of a proprietorship are the income statement, statement of owner's equity, and balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

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43. An income statement is a summary of the revenues and expenses of a business as of a specific date. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 44. A statement of owner's equity reports the changes in the owner's equity for a period of time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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45. The statement of cash flows consists of three sections: cash flows from operating activities, cash flows from income activities, and cash flows from equity activities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 46. The balance sheet represents the accounting equation. a. True b. False ANSWER: POINTS: DIFFICULTY:

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47. Net income and net profit do not mean the same thing. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 48. An example of an external user of accounting information is the federal government. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/18/2017 8:40 AM DATE MODIFIED: 1/19/2017 4:32 PM

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Multiple Choice 49. Profit is the difference between a. the assets purchased with cash contributed by the owner and the cash spent to operate the business b. the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services c. the incoming cash and outgoing cash d. assets and liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 50. Two common areas of accounting that respectively provide information to internal and external users are a. managerial accounting and financial accounting b. financial accounting and tax accounting systems c. managerial accounting and environmental accounting d. forensic accounting and financial accounting ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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51. Which of the following best describes accounting? a. records economic data but does not communicate the data to users according to any specific rules b. is of no use by individuals outside of the business c. is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements d. is an information system that provides reports to users regarding economic activities and condition of a business ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 52. Which type of accountant typically practices as an individual or as a member of a public accounting firm? a. Certified Management Accountant b. Certified Internal Auditor c. Certified Payroll Professional d. Certified Public Accountant ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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53. Financial reports are used by a. investors b. management c. creditors d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:06 AM 54. Which of the following is a manufacturing business? a. Facebook b. General Motors c. American Airlines d. Target ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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55. Which of the following is a service business? a. Dell Computers b. Walmart c. Microsoft d. Facebook ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 2:48 PM 56. Which of the following groups of companies includes examples of merchandising businesses? a. GameStop, Sony, Dell b. Gap Inc., Amazon, Nike Inc. c. GameStop, Best Buy, Gap Inc. d. Delta Air Lines, Marriott, Gap Inc. ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:24 AM

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57. Which of the following groups is considered to be internal users of accounting information? a. employees and managers b. customers and vendors c. government entities and banks d. employees and customers ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:25 AM 58. The following are examples of external users of accounting information except a. government entities b. creditors c. customers d. managers ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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59. Which of the following is the best description of accounting’s role in business? a. Accounting helps in decreasing the credit risk of the company. b. Accounting provides stockholders with information regarding the market value of the company’s stocks. c. Accounting is not responsible for providing any form of information to users. That is the role of the Information Systems Department. d. Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Evaluating QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 60. Managerial accountants would be responsible for providing information regarding a. consumer reports to customers b. profit reports to owners and management c. expansion of a product line report to management d. tax reports to government agencies ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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61. Which of the following is not a certification for accountants? a. CMA b. CISA c. CIA d. IRS ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 62. Which of the following is not a role of accounting in business? a. to provide information to external users to determine the economic performance and condition of the business b. to provide reports to users about the economic activities and conditions of a business c. to personally guarantee loans of the business d. to assess the various informational needs of users and design an accounting system to meet those needs ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:31 AM

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63. Which of the following is a guideline for behaving ethically? I. Identify the consequences of a decision and its effect on others. II. Consider your obligations and responsibilities to those affected by the decision. III. Identify your decision based on personal standards of honesty and fairness. a. II and III b. I and II c. I and III d. I, II, and III ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:33 AM 64. Which of the following would not normally operate as a service business? a. grocer b. lawn care company c. styling salon d. pet groomer ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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65. Most businesses in the United States are a. cooperatives b. proprietorships c. corporations d. partnerships ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 LOCAL STANDARDS: United States - OH - Default City - ACBSP: APC-03-Business Forms United States - OH - Default City - AICPA: FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:35 AM

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67. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a a. corporation b. partnership c. proprietorship d. governmental unit ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 68. Which of the following is true regarding a limited liability company? a. combines the attributes of a partnership and a corporation b. makes up 10% of business organizations in the United States c. provides tax and liability advantages to the owners d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:46 PM

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69. On May 20, White Repair Service extended an offer of $108,000 for land that had been priced for sale at $140,000. On May 30, White Repair Service accepted the seller’s counteroffer of $115,000. On June 20, the land was assessed at a value of $95,000 for property tax purposes. On July 4, White Repair Service was offered $150,000 for the land by a national retail chain. At what value should the land be recorded in White Repair Service’s records? a. $95,000 b. $108,000 c. $115,000 d. $140,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 70. Which of the following is most likely to obtain large amounts of resources by issuing stock? a. corporation b. partnership c. proprietorship d. government entity ANSWER: POINTS: DIFFICULTY:

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71. Which of the following is not a characteristic of a corporation? a. A corporation’s resources are limited to its individual owners’ resources. b. Corporations experience an ease in obtaining large amounts of resources by issuing stock. c. Ownership is divided into shares of stock. d. Corporations are organized as a separate legal taxable entity. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 72. The initials GAAP stand for a. generally accepted accounting principles b. generally accepted plans c. generally accepted accounting practices d. general accounting procedures ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.1-02 - 01 - 02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:40 AM

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73. Within the United States, the dominant body in the primary development of accounting principles is the a. Financial Accounting Standards Board (FASB) b. American Accounting Association (AAA) c. Institute of Management Accountants (IMA) d. American Institute of Certified Public Accountants (AICPA) ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 74. The business entity concept means that a. the owner is part of the business entity b. an entity is organized according to state or federal statutes c. the entity is an individual economic unit for which data are recorded, analyzed, and reported d. an entity is organized according to the rules set by the FASB ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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75. For accounting purposes, the business entity should be considered separate from its owners if the entity is a. a proprietorship b. a partnership c. a corporation d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:41 AM 76. The objectivity concept requires that a. business transactions be consistent with the objectives of the entity b. amounts recorded in the financial statements be based on independently verifiable evidence c. accounting principles meet the objectives of the Securities and Exchange Commission d. the Financial Accounting Standards Board be fair and unbiased in its deliberations over new accounting standards ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:42 AM

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77. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be recorded on the accounting records of which of the following entities? a. Karen Meyer's personal records and the American Red Cross b. Crystal Cleaning and the American Red Cross c. Karen Meyer's personal records, Crystal Cleaning, and the American Red Cross d. Karen Meyer's personal records and Crystal Cleaning ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 78. Equipment with an estimated market value of $30,000 is offered for sale at $45,000. The equipment is acquired for $15,000 in cash and a note payable of $20,000 due in 30 days. The amount used in the buyer's accounting records to record this acquisition is a. $15,000 b. $30,000 c. $35,000 d. $45,000 ANSWER: RATIONALE:

c Amount in Buyer's Accounting Records = Amount Paid in Cash + Amount Paid through Note Payable = $15,000 + $20,000 = $35,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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79. Which of the following is the authoritative body in the United States that has the primary responsibility for developing accounting principles? a. FASB b. AICPA c. SEC d. IRS ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:45 AM 80. Which of the following concepts relates to separating the reporting of business and personal economic transactions? a. objectivity concept b. business entity concept c. unit of measure concept d. cost concept ANSWER: POINTS: DIFFICULTY:

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81. Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $220,000. Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company? a. $232,000 b. $177,000 c. $220,000 d. $212,000 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:45 AM 82. Many countries outside the United States use financial accounting standards issued by the a. AICPA b. SEC c. IASB d. FASB ANSWER: POINTS: DIFFICULTY:

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83. The unit of measure concept a. requires that different units be used for assets and liabilities b. requires that economic data be reported in yen in Japan or dollars in the United States c. is not important when applying the cost concept d. is only used in the financial statements of manufacturing companies ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 84. Which of the following is not true of accounting principles? a. The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting principles. b. Following GAAP allows accounting information users to compare one company to another. c. Financial accountants follow generally accepted accounting principles (GAAP). d. A new accounting principle can be adopted with stockholders' approval. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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85. Assets are a. always lower than liabilities b. the same as expenses because they are acquired with cash c. financed by the owner and/or creditors d. equal to liabilities less owner’s equity ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 86. Debts owed by a business are referred to as a. expenses b. liabilities c. accounts receivable d. owner’s equity ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:47 AM

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87. The accounting equation may be expressed as a. Assets − Liabilities = Owner's Equity b. Assets = Equities − Liabilities c. Assets + Liabilities = Owner's Equity d. Assets = Revenues − Liabilities ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 88. Which of the following is not an asset? a. owner’s equity b. investments c. inventory d. cash ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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89. The assets and liabilities of a company are $128,000 and $84,000, respectively. Owner’s equity should equal a. $128,000 b. $84,000 c. $44,000 d. $212,000 ANSWER: RATIONALE:

c Assets = Liabilities + Owner's Equity $128,000 = $84,000 + Owner's Equity Owner's Equity = $44,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 90. If total liabilities decreased by $46,000 during a period of time and owner's equity increased by $60,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets would be a a. $14,000 increase b. $106,000 increase c. $106,000 decrease d. $14,000 decrease ANSWER: RATIONALE:

a Assets = Liabilities + Owner's Equity = –$46,000 + $60,000 = $14,000 Change in Assets = +$14,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:49 AM

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91. Which of the following is not a business transaction? a. make a sales offer b. pay for supplies c. sell goods for cash d. receive cash for services to be rendered later ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 92. A business paid $7,000 to a creditor in payment of an amount owed. The effect of the transaction on the accounting equation was to a. increase an asset, increase owner's equity b. decrease an asset, decrease a liability c. increase an asset, decrease another asset d. increase an asset, increase a liability ANSWER: RATIONALE:

b Assets = Liabilities + Owner's Equity Asset (Cash) decreases by $7,000 Liability (Accounts Payable) decreases by $7,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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93. Earning revenue a. increases assets, decreases owner's equity b. increases assets, increases owner’s equity c. increases one asset, decreases another asset d. decreases assets, increases liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 94. The monetary value charged to customers for the performance of services sold is called a(n) a. revenue b. net income c. capital d. asset ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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95. Revenues are reported when a. cash is received from the customer b. work is begun on the job c. work is completed on the job d. a contract is signed ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 96. Expenses are recorded when a. a bill is received in advance of services rendered b. cash is paid for services rendered c. assets are used in the process of earning revenue d. assets are purchased ANSWER: POINTS: DIFFICULTY:

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97. Goods purchased on account for future use in the business, such as supplies, are called a. revenues b. prepaid expenses c. liabilities d. prepaid liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 98. The asset created by a business when it makes a sale on account is termed a. accounts payable b. accounts receivable c. prepaid expense d. unearned revenue ANSWER: POINTS: DIFFICULTY:

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99. The debt created by a business when it makes a purchase on account is referred to as an a. asset b. account payable c. expense payable d. account receivable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 100. If total assets decreased by $88,000 during a period of time and owner's equity increased by $71,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities would be a(n) a. $88,000 decrease b. $159,000 decrease c. $159,000 increase d. $17,000 increase ANSWER: RATIONALE:

b Assets = Liabilities + Owner's Equity –$88,000 = Liabilities + $71,000 Liabilities = –$159,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 9:53 AM

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101. Owner's withdrawals a. decrease expenses b. increase expenses c. decrease owner's equity d. increase cash ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 102. How does paying a liability in cash affect the accounting equation? a. liabilities decrease; owner's equity increases b. assets increase; liabilities increase c. assets increase; liabilities decrease d. assets decrease; liabilities decrease ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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103. How does receiving a bill to be paid next month for services received affect the accounting equation? a. assets increase; liabilities increase b. assets decrease; owner's equity decreases c. liabilities increase; owner's equity decreases d. liabilities increase; owner's equity increases ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 104. How does the purchase of equipment by signing a note affect the accounting equation? a. assets increase; assets decrease b. assets increase; liabilities decrease c. assets increase; liabilities increase d. assets increase; owner's equity increases ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 STATE STANDARDS: United States - OH - ICPA: FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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105. Land originally purchased for $30,000 is sold for $62,000 in cash. What is the effect of the sale on the accounting equation? a. assets increase by $30,000; no change in liabilities; owner's equity increases by $62,000 b. assets increase by $62,000; owner's equity increases by $62,000 c. assets increase by $32,000; owner's equity increases by $32,000 d. assets increase by $62,000; liabilities decrease by $30,000; owner's equity increases by $32,000 ANSWER: RATIONALE:

c Net Change in Assets = Increase in Cash – Decrease in Land = $62,000 – $30,000 = +$32,000 Change in Owner's Equity = +$32,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 106. Which of the following accounts is a liability? a. Accounts Payable b. Accounts Receivable c. Service Revenue d. Wages Expense ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 2:52 PM

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107. Abbie Marson is the sole owner and operator of Great Plains Company. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and liabilities of $300,000. During Year 2, Marson invested an additional $73,000 and withdrew $33,000 from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $270,000? a. $370,000 b. $45,000 c. $106,000 d. $50,000 ANSWER: RATIONALE:

b Assets = Liabilities + Owner's Equity Owner's Equity (Year 1) = $940,000 – $300,000 = $640,000 Owner's Equity (Year 2) = $995,000 – $270,000 = $725,000 Increase in Owner's Equity = Owner's Equity (Year 2) – Owner's Equity (Year 1) = $725,000 – $640,000 = $85,000 Net Income during Year 2 = Increase in Owner's Equity – Additional Investment + Withdrawals = $85,000 – $73,000 + $33,000 = $45,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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108. Which of the following asset accounts is increased when a receivable is collected? a. Accounts Payable b. Supplies c. Cash d. Accounts Receivable ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 2:51 PM 109. Transactions affecting owner's equity include a. owner's investments and payment of liabilities b. owner's investments, owner's withdrawals, earning of revenues, and incurrence of expenses c. owner's withdrawals, earning of revenues, incurrence of expenses, and purchase of supplies on account d. owner's investments, earning of revenues, incurrence of expenses, and collection of accounts receivable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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110. Michael Anderson is starting a computer programming business and has deposited an initial investment of $15,000 into the business cash account. Identify how the accounting equation will be affected. a. increase in assets (Cash) and increase in assets (Accounts Receivable) b. increase in assets (Cash) and increase in liabilities (Accounts Payable) c. increase in assets (Accounts Receivable) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and increase in owner’s equity (Michael Anderson, Capital) ANSWER: RATIONALE:

d Assets = Liabilities + Owner's Equity Assets (Cash) increase by $15,000 Owner's equity increases by $15,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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111. Gomez Service Company paid its first installment on a note payable of $2,000. How will this transaction affect the accounting equation? a. decrease in assets (Cash) and decrease in owner’s equity (Note Payable Expense) b. decrease in assets (Cash) and decrease in liabilities (Notes Payable) c. increase in liabilities (Notes Payable) and decrease in assets (Cash) d. decrease in assets (Cash) and decrease in assets (Notes Receivable) ANSWER: RATIONALE:

b Assets = Liabilities + Owner's Equity Assets (Cash) decrease by $2,000 Liabilities (Notes Payable) decrease by $2,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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112. Ramon Ramos has withdrawn $750 from Ramos Repair Company’s cash account to deposit in his personal account. How does this transaction affect Ramos Repair Company’s accounting equation? a. increase in assets (Accounts Receivable) and decrease in assets (Cash) b. increase in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) c. decrease in assets (Cash) and decrease in liabilities (Accounts Payable) d. decrease in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) ANSWER: RATIONALE:

d Assets = Liabilities + Owner's Equity Assets (Cash) decrease by $750 Owner's equity decreases by $750 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 113. Which of the following is not a business transaction? a. Erin provided services to customers earning fees of $600. b. Erin purchased hedge trimmers for her lawn service agreeing to pay the supplier next month. c. Erin pays her monthly personal credit card bill. d. Erin deposits $15,000 in a bank account in the name of Erin’s Lawn Service. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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114. Which of the following is a business transaction? a. plan advertising for upcoming sale b. give employees a raise beginning next month c. submit estimate for construction project d. purchase inventory on account ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 4:16 PM 115. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n) a. prior period statement b. statement of owner's equity c. balance sheet d. income statement ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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116. Which of the following financial statements reports information as of a specific date? a. balance sheet b. statement of cash flows c. statement of owner's equity d. income statement ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 117. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared? a. OE, I, B b. B, I, OE c. I,OE, B d. B,OE, I ANSWER: POINTS: DIFFICULTY:

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118. Liabilities are reported on the a. balance sheet b. statement of cash flows c. statement of owner's equity d. income statement ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 119. Cash investments made by the owner to the business are reported on the statement of cash flows in the a. supplemental statement b. investing activities section c. operating activities section d. financing activities section ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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120. The year-end balance of the owner's capital account appears in a. both the statement of owner's equity and the income statement b. only the statement of owner's equity c. both the statement of owner's equity and the balance sheet d. both the statement of owner's equity and the statement of cash flows ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 121. A financial statement user would determine if a company was profitable or not during a specific period of time by reviewing the a. income statement b. statement of cash flows c. balance sheet d. statement of retained earnings ANSWER: POINTS: DIFFICULTY:

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122. If an owner wanted to know how money flowed into and out of the company, which financial statement would the owner use? a. statement of cash flows b. income statement c. balance sheet d. statement of retained earnings ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 123. The assets section of the balance sheet normally presents assets in a. the order of largest to smallest dollar amounts b. the order of smallest to largest dollar amounts c. alphabetical order d. the order in which they will be converted into cash or used in operations ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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124. All of the following statements regarding the ratio of liabilities to owner’s equity are true except a. the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors b. the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors c. corporations can use this ratio but substitute total stockholders’ equity for total owner’s equity d. a ratio of 1 indicates that liabilities equal owner’s equity ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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125. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000

Dec. 31,Year 1 $120,000 80,000

Compute the ratio of liabilities to owner’s equity for each year. Round to two decimal places. a. 1.07 and 1.19, respectively b. 1.35 and 1.50, respectively c. 1.50 and 1.07, respectively d. 1.19 and 1.35, respectively ANSWER: RATIONALE:

b Ratio of Liabilities to Owner’s Equity = Total Liabilities/Total Owner's Equity Dec. 31, Year 2 $128,250/$95,000 1.35

Dec. 31, Year 1 $120,000/$80,000 1.50

POINTS: DIFFICULTY:

1 Challenging Bloom's Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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126. All of the following are general-purpose financial statements except a(n) a. balance sheet b. statement of owner’s equity c. cash budget d. income statement ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/18/2017 10:29 AM DATE MODIFIED: 1/19/2017 4:33 PM Matching Match the following business types with each business listed below. Each may be used more than once. a. Service business b. Manufacturing business c. Merchandising business DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:47 PM 127. A hospital ANSWER: a POINTS: 1

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128. A dressmaking company ANSWER: b POINTS: 1 129. A supermarket ANSWER: c POINTS: 1 130. A modular homebuilder ANSWER: b POINTS: 1 131. A health club and spa ANSWER: a POINTS: 1 132. A tax preparation firm ANSWER: a POINTS: 1 133. A law firm ANSWER: a POINTS: 1 134. A men’s clothing store ANSWER: c POINTS: 1 135. A book publisher ANSWER: b POINTS: 1 136. An automobile dealer ANSWER: c POINTS: 1 Match the following characteristics with the form of business entity that best describes it. Each may be used more than once. a. Proprietorship b. Partnership c. Corporation d. Limited liability company (LLC) DIFFICULTY:

Easy Bloom's: Remembering

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QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 137. Generates 90% of business revenues ANSWER: c POINTS: 1 138. Easy and cheap to organize ANSWER: a POINTS: 1 139. Often used as an alternative to a partnership ANSWER: d POINTS: 1 140. Owned by two or more individuals ANSWER: b POINTS: 1 141. Used by large business ANSWER: c POINTS: 1 142. Organized as a separate legal taxable entity ANSWER: c POINTS: 1 143. Has the ability to obtain large amounts of resources ANSWER: c POINTS: 1 144. Comprises 70% of business entities in the United States ANSWER: a POINTS: 1 145. Offers tax and legal liability advantages for owners ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Match each transaction with its effect on the accounting equation. Each letter may be used more than once. a. Increase assets, increase liabilities b. Increase liabilities, decrease owner’s equity c. Increase assets, increase owner’s equity d. No effect e. Decrease assets, decrease liabilities f. Decrease assets, decrease owner’s equity DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:47 PM 146. Provided a service to a customer on account ANSWER: c POINTS: 1 147. Cash investment by owner ANSWER: c POINTS: 1 148. Used up supplies that were already on hand ANSWER: f POINTS: 1 149. Paid part of an amount owed to a creditor ANSWER: e POINTS: 1 150. Paid wages ANSWER: f POINTS: 1 151. Paid cash for the purchase of a one-year insurance policy ANSWER: d POINTS: 1

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152. Received utility bill to be paid next month ANSWER: b POINTS: 1 153. Received cash for providing services to customers ANSWER: c POINTS: 1 154. Investment of land by owner ANSWER: c POINTS: 1 155. Cash withdrawal by owner ANSWER: f POINTS: 1 156. Purchased supplies on credit ANSWER: a POINTS: 1 157. Received cash for services provided ANSWER: c POINTS: 1 158. Received payment from a customer on account ANSWER: d POINTS: 1 159. Borrowed money from a bank ANSWER: a POINTS: 1 160. Purchased equipment for cash ANSWER: d POINTS: 1 Match each of the following characteristics with the financial statement that best describes it. Each may be used more than once. a. Income statement b. Balance sheet c. Statement of owner’s equity d. Statement of cash flows DIFFICULTY: QUESTION TYPE:

Easy Bloom's: Remembering Matching

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HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:48 PM 161. The second statement prepared ANSWER: c POINTS: 1 162. The connecting link between the income statement and balance sheet ANSWER: c POINTS: 1 163. Reports only revenues and expenses ANSWER: a POINTS: 1 164. A formal presentation of the accounting equation ANSWER: b POINTS: 1 165. The first statement prepared ANSWER: a POINTS: 1 166. Reports as of a specific date ANSWER: b POINTS: 1 167. Has three sections: operating, investing and financing ANSWER: d POINTS: 1

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Subjective Short Answer 168. Discuss internal and external users of accounting information. What areas of accounting provide them with information? Give an example of the type of report each type of user might use. ANSWER:

Internal users of accounting information include managers and employees. The area of accounting that provides internal users with information is called managerial accounting or management accounting. An example of a report that might be used internally is a customer profitability report.

External users of accounting information include customers, creditors, banks, and government entities. These users are not directly involved in managing or operating the business. The area of accounting that provides external users with information is called financial accounting. General-purpose financial statements are one type of financial accounting report that is distributed to external users. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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169. Companies like Enron, WorldCom, and Tyco International, Ltd. have been caught in the midst of ethical lapses that led to fines, firings, and criminal and/or civil prosecution. List and briefly describe three factors that are responsible for what went wrong in these companies. ANSWER:

The three factors are: (1) individual character, (2) firm culture, and (3) lack of laws and enforcement. Honesty, integrity, and fairness in the face of pressure to hide the truth are important characteristics of an ethical businessperson. The behavior and attitude of senior management set the firm’s culture. In firms like Enron, senior managers created a culture of greed and indifference to the truth. That culture flowed down to lower-level managers, who took shortcuts and lied to cover financial frauds. The lack of laws and enforcement has been blamed as a contributing factor to financial reporting abuses. As a result, new laws such as the Sarbanes-Oxley Act (SOX) established a new oversight body for the accounting profession, known as the Public Company Accounting Oversight Board (PCAOB), and established standards to enhance corporate accountability, financial disclosures, and independence. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:49 PM

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170. List the five steps in the process by which accounting provides information to users. ANSWER:

1. Identify users. 2. Assess users’ information needs. 3. Design the accounting information system to meet users’ needs. 4. Record economic data about business activities and events. 5. Prepare accounting reports for users. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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171. For each of the following companies, identify whether they are a service, merchandising, or manufacturing business. A. B. C. D. E. F. G. H. I.

Dillard's Time Warner Cable General Motors Blockbuster Applebee’s Sony Best Buy Banana Republic H&R Block

ANSWER: A. B. C. D. E. F. G. H. I.

Merchandising Service Manufacturing Service Service/Manufacturing Manufacturing Merchandising Merchandising Service

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.1-01 - 01 - 01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:43 AM

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172. Identify each of the following as either internal or external users of accounting information. A. B. C. D. E. F. G. H.

Payroll manager Bank President’s secretary Internal Revenue Service Raw material vendors Social Security Administration Health insurance provider Managerial accountant

ANSWER: A. B. C. D. E. F. G. H.

Internal External Internal External External External External Internal

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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173. What is the major difference between the objective of financial accounting and the objective of managerial accounting? ANSWER:

The objective of financial accounting is to provide information for the decisionmaking needs of external users. The objective of managerial accounting is to provide information for internal users. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 174. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions. ANSWER: POINTS: DIFFICULTY:

Accounting reports would become unstable and unreliable. 1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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175. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15, Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what value should the land be recorded in Carpet Barn Company’s records? ANSWER: POINTS: DIFFICULTY:

$95,000 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 176. Donner Company is selling a piece of land adjacent to its business. An appraisal reported the market value of the land to be $120,000. Focus Company initially offered to buy the land for $107,000. The companies settled on a purchase price of $115,000. On the same day, another piece of land on the same block sold for $122,000. Under the cost concept, what amount will be used to record this transaction in the accounting records? ANSWER: POINTS: DIFFICULTY:

$115,000 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:45 AM

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177. Explain the meaning of the business entity concept. ANSWER:

The business entity concept limits the economic data in an accounting system to data related directly to the activities of the business. In other words, the business is viewed as an entity separate from its owners, creditors, or other businesses. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 178. Darnell Company purchased $88,000 of computer equipment from Joseph Company. Darnell Company paid for the equipment using cash that had been obtained from the initial investment by Donnie Darnell. Which entity or entities (Darnell Company, Joseph Company, and Donnie Darnell) should record the transaction involving the computer equipment on their accounting records? ANSWER: POINTS: DIFFICULTY:

Darnell Company and Joseph Company 1 Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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179. Bob Johnson is the sole owner of Johnson’s Carpet Cleaning Service. Bob purchased a personal automobile for $10,000 cash plus he took out a loan for $20,000 in his name. Describe how this transaction is related to the business entity concept. ANSWER:

Under the business entity concept, economic data are limited to the direct activities of the business. The business is viewed as separate from its owner. Therefore, when Bob buys a personal automobile, it is not listed on the books of Johnson’s Carpet Cleaning Service, unless Bob invests it in the business. In this case, the loan is a personal debt and not a liability of the company, and the cash is from Bob’s personal account and not the company’s account. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:47 AM 180. Discuss the characteristics of a limited liability company (LLC). ANSWER:

A limited liability company (LLC) combines the attributes of a partnership and a corporation. It is often used as an alternative to a partnership because it has tax and legal liability advantages for owners. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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181. Explain the meaning of: (a) the objectivity concept (b) the unit of measure concept ANSWER:

(a) The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. In exchanges between a buyer and a seller, both try to get the best price. Only the final agreed-upon amount is objective enough to be recorded in the accounting records.

(b) The unit of measure concept requires that economic data be recorded in dollars. Money is a common unit of measurement for entering financial data and preparing reports. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:52 AM

182. Dave Ryan is the owner and operator of Ryan's Arcade. At the end of its accounting period, December 31, Ryan’s Arcade ha $450,000 and liabilities of $125,000. Using the accounting equation, determine the following amounts: (a) owner’s equity as of December 31 of the current year (b) owner’s equity as of December 31 at the end of the next year, assuming that assets increased by $65,000 and liabilities increased by $35,000 during the year ANSWER:

(a)

$325,000 ($450,000 − $125,000)

(b)

$355,000 [($450,000 + $65,000) − ($125,000 + $35,000)]

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM Copyright Cengage Learning. Powered by Cognero.

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183. Krammer Company has liabilities equal to one-fourth of the total assets. Krammer’s owner’s equity is $45,000. Using the accounting equation, what is the amount of liabilities for Krammer? ANSWER:

Assets = Liabilities + Owner’s Equity 4x = x + $45,000 3x = $45,000 x = $15,000 in liabilities POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:53 AM 184. Determine the missing amount for each of the following: Assets (a) $30,000 53,000

Liabilities $38,000 (b) 32,000

Owner's Equity $45,000 22,000 (c)

(a) $83,000 ($38,000 + $45,000) (b) $8,000 ($30,000 – $22,000) (c) $21,000 ($53,000 – $32,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:53 AM ANSWER:

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185. Determine the missing amount designated with an “X” for each of the following:

(a) (b) (c)

ANSWER:

Assets $78,500 X 49,500

Liabilities $37,600 53,280 X

Owner’s Equity X $145,000 34,000

(a) $40,900 ($78,500 − $37,600) (b) $198,280 ($53,280 + $145,000)

(c) $15,500 ($49,500 − $34,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 10:58 AM

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186. Use the accounting equation to answer each of the independent questions below. (a) At the beginning of the year, Norton Company's assets were $75,000 and its owner’s equity was $38,000. During the year, assets increased by $18,000 and liabilities increased by $4,000. What was the owner’s equity at the end of the year? (b) At the beginning of the year, Turpin Industries had liabilities of $44,000 and owner’s equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner’s equity at the end of the year? ANSWER:

(a) $75,000 − $38,000 = $37,000 beginning of year liabilities ($75,000 + $18,000) − ($37,000 + $4,000) = $52,000 end of year owner’s equity

(b) $44,000 + $66,000 = $110,000 beginning of year assets ($110,000 + $10,000) − ($44,000 − $5,000) = $81,000 end of year owner’s equity POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:51 PM

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187. On July 1 of the current year, the assets and liabilities of John Wong, DVM, are as follows: Cash, $27,000; Accounts Receivable, $12,300; Supplies, $3,100; Land, $35,000; Accounts Payable, $13,900. What is the amount of owner's equity (John Wong’s capital) as of July 1 of the current year? ANSWER:

$63,500 ($27,000 Cash + $12,300 Accounts Receivable + $3,100 Supplies + $35,000 Land − $13,900 Accounts Payable = $63,500) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:52 PM 188. Ting Hsu is the owner of Hsu’s Financial Services. At the end of its accounting period, December 31, of Year 1, Hsu’s has assets of $575,000 and owner’s equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts: (a) Hsu’s liabilities as of December 31 of Year 1. (b) Hsu’s liabilities as of December 31 of Year 2, assuming that assets increased by $56,000 and owner’s equity decreased by $32,000. (c) Net income or net loss during Year 2, assuming that as of December 31, Year 2, assets were $592,000, liabilities were $450,000, and there were no additional investments or withdrawals. ANSWER:

(a) $575,000 − $335,000 = $240,000 (b) ($575,000 + $56,000) − ($335,000 − $32,000) = $328,000 (c) $592,000 − $450,000 = $142,000 owner's equity (Year 2) $335,000 − $142,000 = $193,000 net loss POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:53 PM Copyright Cengage Learning. Powered by Cognero.

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189. Indicate whether each of the following accounts represents an asset, liability, or owner's equity: (a) (b) (c) (d) (e) (f)

Accounts Payable Wages Expense Capital Accounts Receivable Withdrawal Land

(a) liability (b) owner’s equity (c) owner’s equity (d) asset (e) owner’s equity (f) asset POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM ANSWER:

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190. Martin Blair is the owner and operator of Martin Consultants. At December 31 of the current year, Martin Consultants has assets of $430,000 and liabilities of $205,000. Using the accounting equation and considering each case independently, determine the following: (a) Martin Blair, capital, as of December 31. (b) Martin Blair, capital, as of December 31 of the next year, assuming that assets increased by $12,000 and liabilities increased by $15,000. (c) Martin Blair, capital, as of December 31 of the next year, assuming that assets decreased by $8,000 and liabilities increased by $14,000. ANSWER:

(a) $430,000 − $205,000 = $225,000 (b) ($430,000 + $12,000) − ($205,000 + $15,000) = $222,000

(c) ($430,000 − $8,000) − ($205,000 + $14,000) = $203,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:54 PM

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The accountant for Scott Industries prepared the following list of accounting equation element balances from the company’s records for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income taxes payable Notes payable

$165,000 14,000 64,000 12,000 40,000 5,000 20,000

Cash Selling expenses Scott, capital Interest income Prepaid rent Income taxes expense Rent expense

$30,000 44,000 27,000 3,000 2,000 18,000 20,000

191. Determine the total assets at the end of the current year for Scott Industries. ANSWER:

$110,000 ($30,000 Cash + $14,000 Accounts Receivable + $64,000 Equipment + $2,000 Prepaid Rent = $110,000)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Scott Industries LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:55 PM

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192. Determine the total liabilities at the end of the current year for Scott Industries. $37,000 ($12,000 Accounts Payable + $5,000 Income Taxes Payable + $20,000 Notes Payable = $37,000)

ANSWER:

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Scott Industries LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:55 PM 193. Based on the information for Scott Industries, is it profitable? Explain your answer. ANSWER:

($165,000 Fees Earned + $3,000 Interest Income) − ($40,000 Salaries and Wages Expense + $44,000 Selling Expenses + $18,000 Income Taxes Expense + $20,000 Rent Expense) = $46,000 Net Income

Scott Industries had net income for the period of $46,000. Since revenues exceeded expenses for the period, the company would be considered profitable. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Scott Industries LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 1:57 PM 194. Daniels Company is owned and operated by Thomas Daniels. The following selected transactions were completed by Daniels Company during May: 1. Received cash from owner as additional investment, $55,000. Copyright Cengage Learning. Powered by Cognero.

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2. 3. 4. 5. 6.

Paid creditors on account, $7,000. Billed customers for services on account, $2,565. Received cash from customers on account, $8,450. Paid cash to owner for personal use, $2,500. Received the utility bill, $160, to be paid next month.

Indicate the effect of each transaction on the accounting equation by: (a) Accounting equation element type: (A) assets, (L) liabilities, (OE) owner’s equity, (R) revenue, and (E) expense b) Name of accounting equation element c) The amount of the transaction d) The direction of change (increase or decrease) in the account affected Note: Each transaction has two entries. Entry Entry Accounting Name of Accounting Name of Equation Accounting Increase or Equation Accounting Increase or Element Equation Amount Decrease Element Equation Amount Decrease (c) (c) Type Element (d) Type Element (d) (a) (b) (a) (b) 1 2 3 4 5 6 ANSWER:

Entry Entry Accounting Name of Accounting Name of Increase Increase Equation Accounting Equation Accounting or Element Equation Amount Element Equation Amount Decrease Decrease (c) (c) Type Element Type Element (d) (a) (b) (a) (b) 1 A Cash $55,000 Increase OE Capital $55,000 Increase A Cash $7,000 Decrease L Accounts $7,000 Decrease 2 Payable A Accounts $2,565 Increase R Fees Earned $2,565 Increase 3 Receivable A Cash $8,450 Increase A Accounts $8,450 Decrease 4 Receivable 5 A Cash $2,500 Decrease OE Drawing $2,500 Increase L Accounts $160 Increase E Utilities $160 Increase 6 Payable Expense

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POINTS: DIFFICULTY:

1 Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:51 PM 195. Collins Landscape Company purchased various landscaping supplies on account to be used for landscape designs for its customers. How will this business transaction affect the accounting equation? ANSWER: POINTS: DIFFICULTY:

Increase assets (Supplies) and increase liabilities (Accounts Payable) 1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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196. Shiny Kar Company had the following transactions. For each transaction, show the effect on the accounting equation by putting the amount and direction (+, –, or NC for no change) in each box of the table below.

Assets Liabilities

Owner’s Equity

(a) Shiny Kar withdrew $500 cash for food (b) Shiny Kar Company sold 2 cars for a total of $55,000 on account (c) The cost of the cars sold in (b) above was $40,000 (d) Shiny Kar received a $35,000 payment for a car previously sold on account (e) Shiny Kar paid $450 for advertising (f) Shiny Kar purchased $150 of cleaning supplies on account

ANSWER: (a) (b) (c) (d) (e) (f)

Assets −$500 +$55,000 −$40,000 NC −$450 +$150

Liabilities NC NC NC NC NC +$150

Owner’s Equity −$500 +$55,000 −$40,000 NC −$450 NC

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:03 PM

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197. Ramierez Company received its first electric bill in the amount of $60 which will be paid next month. How will this transaction affect the accounting equation? ANSWER:

Increase liabilities (Accounts Payable) and decrease owner’s equity (Utilities Expense) POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 198. Simpson Auto Body Repair purchased $20,000 of machinery. The company paid $8,000 in cash at the time of the purchase and signed a promissory note for the remainder to be paid in four monthly installments. (a) How will the purchase affect the accounting equation? (b) How will the payment of the first monthly installment affect the accounting equation (ignore interest)? ANSWER:

(a) Increase total assets by a net amount of $12,000 (increase Machinery, $20,000 and decrease Cash, $8,000) and increase liabilities by $12,000 (Notes Payable, $12,000)

(b) Decrease assets by $3,000 (decrease Cash,$3,000) and decrease liabilities by $3,000 (Notes Payable,$3,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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199. Indicate how the following transactions affect the accounting equation. (a) The purchase of supplies on account (b) The purchase of supplies for cash (c) A withdrawal by the owner to pay personal expenses (d) Revenues received in cash (e) Sale made on account ANSWER:

(a) Assets increase; liabilities increase (b) No effect (c) Assets decrease; owner's equity decreases (d) Assets increase; owner’s equity increases (e) Assets increase; owner’s equity increases POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

Page 94

200. (a) A vacant lot acquired for $83,000 cash is sold for $127,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? (b) Assume that the seller owes $52,000 for the land. After receiving the $127,000 cash in (a), the seller pays the $52,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? ANSWER:

(a) (1) Total assets increased $44,000 (2) No change in liabilities (3) Owner’s equity increased $44,000

(b) (1) Total assets decreased $52,000 (2) Total liabilities decreased $52,000 (3) No change in owner’s equity POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:17 AM 201. Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, Austin Land Company paid off the loan. Explain the effect of the sale and the payoff of the loan on the accounting equation. ANSWER:

Total assets decrease $20,000 (Cash increases by $45,000; Land decreases by $65,000) Total liabilities decrease $40,000 (Note payoff to Regions) Owner's equity increases $20,000 (Sales price − Cost of the land) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:04 PM Copyright Cengage Learning. Powered by Cognero.

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202. There are four transactions that affect owner’s equity. (a) What are the two types of transactions that increase owner’s equity? (b) What are the two types of transactions that decrease owner’s equity? ANSWER:

(a) Additional investment by the owner and increase in revenues (b) Withdrawal made by the owner and increase in expenses POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 203. Identify each of the following as an (1) increase to owner's equity or a (2) decrease to owner's equity. (a) (b) (c) (d) (e) (f)

Fees earned Wages expense Withdrawals Lawn care revenue Investment Supplies expense

(a) 1 (b) 2 (c) 2 (d) 1 (e) 1 (f) 2 POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:20 AM ANSWER:

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204. Given the following: Beginning capital Ending capital Owner withdrawal

$58,000 30,000 25,000

Calculate net income or net loss. ANSWER:

Ending capital Beginning capital Decrease in capital Less withdrawals Net loss

$30,000 58,000 $28,000 25,000 $ 3,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:21 AM

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205. Selected transactions completed by a proprietorship are described below. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)

Received cash from owner as an additional investment Purchased supplies on account Paid rent for the current month Received cash for services sold to customers Returned some defective supplies purchased in (b) Paid insurance premiums in advance Paid cash to creditor for purchases in (b) Charged customers for services sold on account Paid cash to a customer as a refund for an overcharge Received cash on account from customers Owner withdrew cash for personal use Recorded the cost of supplies used during the year Received invoice for electricity used Paid wages Purchased a truck for cash

A _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

L _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

OE _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

A L OE (a) + + (b) + + (c) − − (d) + + (e) − − (f) +,− (g) − − (h) + + (i) − − (j) +,− (k) − − (l) − − (m) + − (n) − − (o) +,− POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM ANSWER:

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206. The accountant for Flagger Company prepared the following list of accounting equation element balances from the company’s records for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income taxes payable Notes payable

$165,000 14,000 42,000 12,000 40,000 5,000 20,000

Cash Selling expenses Flagger, capital Interest income Rent expense Prepaid rent Income taxes expense

$30,000 44,000 36,000 3,000 51,000 2,000 18,000

Prepare an income statement for Flagger Company in good form. ANSWER: Flagger Company Income Statement For the Year Ended December 31 Revenues: Fees earned Interest income Expenses: Rent expense Selling expenses Salary and wages expense Income taxes expense Total expenses Net income

$165,000 3,000

$168,000

$ 51,000 44,000 40,000 18,000 153,000 $ 15,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:22 AM

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The assets and liabilities of Thompson Computer Services at March 31, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner was $180,000 at April 1, the beginning of the current year. Mr. Thompson invested an additional $25,000 in the business during the year. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Drawing

$ 1,030 1,240 1,670 23,550 16,570

207. Prepare an income statement for the current year ended March 31. ANSWER: Thompson Computer Services Income Statement For the Year Ended March 31 Fees earned

$73,450

Expenses: Wages expense

$23,550

Office expense

1,240

Miscellaneous expense

1,030

Total expenses Net income

25,820 $47,630

POINTS: DIFFICULTY:

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208. Prepare a statement of owner’s equity for Thompson Computer Services for the current year ended March 31. ANSWER: Thompson Computer Services Statement of Owner’s Equity For the Year Ended March 31 Thompson, capital, April 1

$180,000

Additional investment by owner during year

$ 25,000

Net income for the year

47,630

Withdrawals

(16,570)

Increase in owner’s equity

56,060

Thompson, capital, March 31

$236,060

POINTS: DIFFICULTY:

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209. Prepare a balance sheet for Thompson Computer Services for the current year ended March 31. ANSWER:

Assets

Thompson Computer Services Balance Sheet March 31 Liabilities

Cash

$ 21,420 Accounts payable

$ 2,000

Accounts receivable

10,340

Supplies

1,670

Land

47,000

Building

157,630 Thompson capital

236,060

Total assets

Total liabilities and $238,060 owner’s equity

$238,060

Owner’s Equity

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Thompson Computer Services LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:05 PM 210. A summary of cash flows for Linda's Design Services for the year ended December 31 is shown below. Cash receipts: Cash received from customers Cash received from additional investment by owner

$83,990 25,000

Cash payments: Cash paid for expenses Cash paid for land Cash paid for supplies Drawing

$27,000 47,000 410 5,000

Cash balance as of January 1

$40,600

Prepare a statement of cash flows for Linda's Design Services for the year ended December 31. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: Linda's Design Services Statement of Cash Flows For the Year Ended December 31 Cash flows from operating activities: Cash received from customers

$83,990

Cash payments for expenses and supplies

(27,410) $ 56,580

Net cash flow from operating activities Cash flows from investing activities:

(47,000)

Cash paid for land Cash flows from financing activities: Cash investment received from owner

$25,000

Cash withdrawal by owner

(5,000)

Net cash flow from financing activities

20,000

Net increase in cash during year

$29,580

Cash as of January 1

40,600

Cash as of December 31

$70,180

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:07 PM

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211. What information does the income statement give to business users? ANSWER:

The income statement reports the revenues and expenses for a period of time. The result is either a net income or a net loss. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 212. What are the three sections of the statement of cash flows? ANSWER: POINTS: DIFFICULTY:

operating activities, investing activities, and financing activities 1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:34 AM 213. Match the following items to the financial statement where they can be found. (Hint: Some of the items can be found on more than one financial statement.) A. Balance sheet B. Income statement C. Statement of cash flows D. Statement of owner’s equity

1. 2. 3. 4. 5. 6.

Item Withdrawals Revenues Supplies Land Accounts payable Accounts receivable

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7. 8. 9. 10.

Operating activities Wages expense Net income Cash

ANSWER:

Answer 1. D (If Cash, also C) 2. B 3. A 4. A

Item Withdrawals Revenues Supplies Land

5. A

Accounts payable

6. A

Accounts receivable

7. C

Operating activities

8. B

Wages expense

9. D & B (if using the indirect method, also Net income C) 10. A & C

Cash

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:35 AM

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214. Name and describe the four primary financial statements for a proprietorship. ANSWER:

1. Income statement: A summary of the revenue and expenses for a specific period of time, such as a month or a year. 2. Statement of owner’s equity: A summary of the changes in the owner’s equity that have occurred during a specific period of time such as a month or a year. 3. Balance sheet: A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year.

4. Statement of cash flows: A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 215. A summary of cash flows for Evelyn's Event Planning for the year ended December 31 is shown below. Cash receipts: Cash received from customers Cash received from bank loan

$57,360 15,000

Cash payments: Cash paid for operating expenses Cash paid for equipment Cash paid for party supplies Drawing

$12,120 18,070 9,480 12,000

Cash balance as of January 1

$15,580

Prepare a statement of cash flows for Evelyn's Event Planning for the year ended December 31. ANSWER: Evelyn's Event Planning Statement of Cash Flows For the Year Ended December 31 Cash flows from operating activities: Copyright Cengage Learning. Powered by Cognero.

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Cash received from customers Cash payments for expenses and supplies

$57,360 (21,600) $35,760

Net cash flow from operating activities Cash flows from investing activities: Cash paid for equipment Cash flows from financing activities: Cash received from bank loan Cash withdrawals by owner Net cash flow from financing activities Net increase in cash during year Cash as of January 1 Cash as of December 31

(18,070)

$15,000 (12,000) 3,000 $20,690 15,580 $36,270

POINTS: DIFFICULTY:

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216. The assets and liabilities of Rocky's Day Spa at December 31 and its expenses for the year are listed below. The capital of the owner was $68,000 at January 1. The owner invested an additional $10,000 during the year. Net income for the year is $45,625. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies ??? Wages expense 56,000 Drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare an income statement for the current year ended December 31. ANSWER: Rocky's Day Spa Income Statement For the Year Ended December 31 Fees earned Expenses:

$98,435 Wages expense Spa operating expense Office expense Total expenses

Net income

$26,580 23,760 2,470 52,810 $45,625

POINTS: DIFFICULTY:

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217. The assets and liabilities of Rocky's Day Spa on December 31 and its revenue and expenses for the year are listed below. The capital of the owner was $68,000 on January 1. The owner invested an additional $10,000 during the year. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense ??? Spa supplies 98,435 Wages expense 56,000 Drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare a balance sheet for the year ended December 31. ANSWER:

Assets Cash Accounts receivable Spa supplies Computers Spa furniture and equipment Total assets

Rocky's Day Spa Balance Sheet December 31 Liabilities $13,980 Accounts payable 8,490 9,230 2,130 Owner’s Equity 56,000 $89,830

Owner's capital Total liabilities and owner’s equity

$ 4,375

85,455 $89,830

POINTS: DIFFICULTY:

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218. The assets and liabilities of Rocky's Day Spa on December 31 and its revenue and expenses for the year are listed below. The capital of the owner is $68,000 on January 1. The owner invested an additional $10,000 during the year. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies 98,435 Wages expense 56,000 Drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare a statement of owner’s equity for the current year ended December 31. ANSWER: Rocky's Day Spa Statement of Owner’s Equity For the Year Ended December 31 $68,000

Owner's capital, January 1 Additional investment by owner during year

$ 10,000

Net income for the year

45,625

Withdrawals

(38,170)

Increase in owner’s equity

17,455

Owner's capital, December 31

$85,455

POINTS: DIFFICULTY:

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219. Explain the interrelationship between the balance sheet and the statement of cash flows. ANSWER:

The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM 220. From the following list of items taken from Lamar’s accounting records, identify those that would appear on the income statement. (a) (b) (c) (d) (e) (f) (g)

Rent expense Land Capital Fees earned Withdrawal Wages expense Investment

ANSWER: POINTS: DIFFICULTY:

(a), (d), (f) 1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

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221. Identify which of the following items would appear on a balance sheet. (a) (b) (c) (d) (e) (f) (g)

Cash Fees earned Joe Brown, capital Wages payable Rent expense Prepaid advertising Land

ANSWER: POINTS: DIFFICULTY:

(a), (c), (d), (f), (g) 1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:43 AM

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222. Indicate whether each of the following activities would be reported on the statement of cash flows as an operating activity, an investing activity, or a financing activity, or if it does not appear on the cash flow statement. (a) (b) (c) (d) (e) (f) (g)

Cash paid for building Cash paid to suppliers Cash paid for owner's withdrawal Cash received from customers Cash received from the owner's investment Cash received from the sale of a building Borrowed cash from a bank

(a) Investing (b) Operating (c) Financing (d) Operating (e) Financing (f) Investing (g) Financing POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:44 AM ANSWER:

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223. For each of the following, determine the amount of net income or net loss for the year. (a) (b) (c) (d)

Revenues for the year totaled $71,300 and expenses totaled $35,500. The owner made an additional investment of $15,000 during the year. Revenues for the year totaled $220,500 and expenses totaled $175,000. The owner withdrew $40,000 during the year. Revenues for the year totaled $149,000 and expenses totaled $172,000. The owner invested an additional $12,000 and withdrew $16,000 during the year. Revenues for the year totaled $198,150 and expenses totaled $174,200. The owner withdrew $35,000 during the year.

(a) $35,800 net income ($71,300 − $35,500) (b) $45,500 net income ($220,500 − $175,000) (c) $23,000 net loss ($149,000 − $172,000) (d) $23,950 net income ($198,150 − $174,200) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM ANSWER:

224. The total assets and total liabilities of Paul’s Pools, a proprietorship, at the beginning and at the end of the current fiscal year are as follows:

Total assets Total liabilities (a) (b)

(c)

(d)

January 1 December 31 $280,000 $475,000 205,000 130,000

Determine the amount of net income earned during the year. The owner did not invest any additional assets in the business during the year and made no withdrawals. Determine the amount of net income during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner withdrew $53,000 in cash during the year (no additional investments). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner invested an additional $35,000 in cash in the business in June of the current fiscal year (no withdrawals). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner invested an additional $12,000 in cash in August of the

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current fiscal year and made 12 monthly cash withdrawals of $1,500 each during the year.

ANSWER:

(a) Owner's equity at end of year ($475,000 − $130,000)

$345,000

Owner's equity at beginning of year ($280,000 − $205,000)

75,000

Net income

$270,000

(b) Increase in owner's equity as in (a) Add withdrawals Net income

$270,000 53,000 $323,000

$270,000 35,000 $235,000

(d) Increase in owner's equity as in (a) Add withdrawals ($1,500 × 12)

$270,000 18,000 $288,000 12,000 $276,000

Deduct additional investment Net income POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:46 AM

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225. Selected transaction data of a business for September are summarized below. Determine the following amounts for September: (a) total revenue, (b) total expenses, (c) net income. $33,000 28,000

Service sales charged to customers on account during September Cash received from cash customers for services performed in September Cash received from customers on account during September: Services performed and charged to customers prior to September Services performed and charged to customers during September Expenses incurred prior to September and paid during September Expenses incurred and paid in September Expenses incurred in September but not paid in September Expenses for supplies used and insurance (not included above) applicable to September

13,000 18,000 6,500 36,250 5,000 2,000

(a) $61,000 ($33,000 + $28,000) (b) $43,250 ($36,250 + $5,000 + $2,000) (c) $17,750 ($61,000 − $43,250) POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM ANSWER:

226. On March 1, the amount of Richard Cook's capital in Richard’s Catering Company was $150,000. During March, he withdrew $31,000 from the business. The amounts of the various assets, liabilities, revenues, and expenses are as follows: Accounts payable Accounts receivable Cash Fees earned Insurance expense Land Miscellaneous expense Prepaid insurance Rent expense Salary expense Supplies Supplies expense Utilities expense Copyright Cengage Learning. Powered by Cognero.

$10,250 45,950 23,840 64,950 1,275 85,400 1,210 3,000 9,000 20,300 900 525 2,800 Page 116

Present, in good form, (a) an income statement for March, (b) a statement of owner's equity for March, and (c) a balance sheet as of March 31. ANSWER:

(a) Richard’s Catering Company Income Statement For the Month Ended March 31 Fees earned Expenses: Salary expense Rent expense Utilities expense Insurance expense Supplies expense Miscellaneous expense Total expenses Net income

$64,950 $20,300 9,000 2,800 1,275 525 1,210 35,110 $29,840

(b) Richard’s Catering Company Statement of Owner's Equity For the Month Ended March 31 Richard Cook, capital, March 1 Net income for the month $29,840 Withdrawals (31,000) Decrease in owner's equity Richard Cook, capital, March 31

$150,000

(1,160) $148,840

QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

$ 23,840

Accounts payable

Accounts receivable

45,950

Prepaid insurance

3,000

Owner's Equity

Supplies

900

Richard Cook, capital

Land

85,400

Total liabilities and

$159,090

owner's equity

Total assets POINTS: DIFFICULTY:

Liabilities $ 10,250

148,840 $159,090

1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.01-05 - 01-05

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ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:49 AM 227. Harris Designers began operations on April 1. The financial statements for Harris Designers are shown below for the month ended April 30, (the first month of operations). Determine the missing amounts for letters (a) through (o). Harris Designers Income Statement For the Month Ended April 30 Fees earned Expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total expenses Net income

$27,000 $5,250 (a) 4,600 400 1,250 $

(b) (c)

Harris Designers Statement of Owner's Equity For the Month Ended April 30 Lori Harris, capital, April 1 Investment on April 1 Net income for April Withdrawals Increase in owner's equity Lori Harris, capital, April 30

$35,000 (d) (6,000) (e) $38,100 Harris Designers Balance Sheet April 30

Assets Cash Supplies Land

(f) 8,100 (g)

Total assets

$55,900

Liabilities Accounts payable Owner's Equity Lori Harris, capital Total liabilities and owner's equity

Harris Designers Statement of Cash Flows For the Month Ended April 30 Cash flows from operating activities: Cash received from customers Cash payments for expenses and payments to Copyright Cengage Learning. Powered by Cognero.

$(h) (i) $(j)

$23,000

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creditors Net cash flow from operating activities Cash flows from investing activities:

(4,200) $18,800 (17,000)

Cash payments for acquisition of land Cash flows from financing activities: Cash received as owner's investment

$ (k) (l)

Cash withdrawal by owner

(m)

Net cash flow from financing activities Net increase in cash and April 30 cash balance

(n)

Place your answers in the space provided below. Hint: Use the interrelationships among the financial statements to solve this problem. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)

___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________

ANSWER:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)

POINTS: DIFFICULTY:

1 Challenging

$6,400 $17,900 $9,100 $9,100 $38,100 $30,800 $17,000 $17,800 $38,100 $55,900 $35,000 $6,000 $29,000 $30,800

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Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 11:57 AM

Page 120

228. Using the following accounting equation elements and their balances, prepare, in good form, an income statement for Heavenly Futures Company for the month ended August 31. Telephone expense Cash Accounts payable Jason Heavenly, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Heavenly, capital (August 1) Wages expense

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800

Utilities expense

750

Notes payable

2,400

Office expense

420

ANSWER: Heavenly Futures Company Income Statement For the Month Ended August 31 Fees earned Expenses: Wages expense Rent expense Telephone expense Utilities expense Office expense Total expenses Net income

$15,700 $4,800 1,400 1,150 750 420 8,520 $ 7,180

POINTS: DIFFICULTY:

Page 121

229. Using the following accounting equation elements and their balances, prepare, in good form, a statement of owner’s equity for Bright Futures Company for the month ended August 31. Telephone expense Cash Accounts payable Jason Bright, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Bright, capital (August 1) Wages expense Utilities expense Notes payable Office expense

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420

ANSWER: Bright Futures Company Statement of Owner’s Equity For the Month Ended August 31 Jason Bright, capital, August 1 $14,320 Net income for August $7,180 Withdrawals

800

Increase in owner’s equity Jason Bright, capital, August 31

6,380 $20,700

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:42 PM 230. Eric Wood, CPA, was organized on January 1 as a proprietorship. List the errors that you find in the following financial statements and prepare the corrected statements for the three months ended March 31. Eric Wood, CPA Copyright Cengage Learning. Powered by Cognero.

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Income Statement For the Three Months Ended March 31 Fees earned Expenses: Salary expense Rent expense Advertising expense Utilities expense Miscellaneous expense Answering service expense Supplies expense Total expenses Net income

$42,000 $9,735 5,200 3,950 3,225 4,000 2,550 4,000 28,000 $14,000

Eric Wood, CPA Statement of Owner's Equity March 31 Eric Wood, capital, January 1 Investment on January 1 Net income for the three months Withdrawals Increase in owner's equity Eric Wood, capital, March 31

Assets Land Cash Accounts payable Supplies Total assets

ANSWER:

$20,000 14,000 (5,000) 31,000 $31,000

Balance Sheet For the Three Months Ended March 31 Owner's Equity $13,000 Eric Wood, capital 10,860 Liabilities 2,670 Accounts receivable 925 $33,225 Total liabilities and owner's equity

$31,000 2,225 $33,225

Errors in the Eric Wood, CPA, financial statements include the following: (1)

(5)

Miscellaneous expense is incorrectly listed after utilities expense on the income statement. Miscellaneous expense should be listed as the last expense, regardless of the amount. The operating expenses are incorrectly added. Instead of $28,000, the total should be $32,660. Because operating expenses are incorrectly added, the net income is incorrect. It should be listed as $9,340. The statement of owner's equity should be for a period of time instead of a specific date. That is, the statement of owner's equity should be reported "For the Three Months Ended March 31." Because the net income was incorrect, the increase in owners' equity and the

Page 123

(2) (3) (4)

balance in Eric Wood, Capital are incorrect. They should both be shown as $24,340. (6) The name of the company is missing from the balance sheet heading. (7) The balance sheet should be as of "March 31," not "For the Three Months Ended March 31." (8) Cash, not land, should be the first asset listed on the balance sheet. (9) Accounts payable is incorrectly listed as an asset on the balance sheet. Accounts payable should be listed as a liability. (10) Liabilities should be listed on the balance sheet ahead of owner's equity. (11) Accounts receivable is incorrectly listed as a liability on the balance sheet. Accounts receivable should be listed as an asset. (12) The assets do not total to $33,225 as shown, making the balance sheet out of balance. Correctly prepared financial statements for Eric Wood, CPA, are shown below. Eric Wood, CPA Income Statement For the Three Months Ended March 31 Fees earned Expenses: Salary expense Rent expense Supplies expense Advertising expense Utilities expense Answering service expense Miscellaneous expense Total expenses Net income

$42,000 $9,735 5,200 4,000 3,950 3,225 2,550 4,000 32,660 $ 9,340

Eric Wood, CPA Statement of Owner's Equity For the Three Months Ended March 31 Eric Wood, capital, January 1 Investment on January 1

$20,000

Net income for three months

9,340

Withdrawals

(5,000)

Increase in owner's equity

24,340

Eric Wood, capital, March 31

$24,340 Eric Wood, CPA Balance Sheet March 31

Page 124

Assets Cash

Liabilities $10,860

Accounts payable

Accounts receivable

2,225

Supplies

925

Land

13,000

Total assets

$27,010

$ 2,670

Owner's Equity Eric Wood, capital

24,340

Total liabilities and owner's equity $27,010

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 2/20/2017 2:14 PM 231. Using the following accounting equation elements and their balances, prepare, in good format a balance sheet in report form for Bright Futures Company for the month ended August 31. Telephone expense Cash Accounts payable Jason Bright, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Bright, capital (August 1) Wages expense Utilities expense Notes payable Office expense

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420

ANSWER: Bright Futures Company Balance Sheet August 31 Assets Cash Copyright Cengage Learning. Powered by Cognero.

$ 3,000 Page 125

Accounts receivable Supplies Computer equipment Total assets

1,500 140 20,000 $24,640

Liabilities Accounts payable Notes payable Total liabilities Owner's Equity Jason Bright, capital Total liabilities and owner’s equity POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 3/15/2017 5:00 PM

$ 1,540 2,400 $ 3,940 20,700 $24,640

232. The accounting equation elements and their balances of Awesome Travel Services at December 31 are listed below. There were no additional investments or withdrawals by J. Trendsetter during the year. Accounts payable Accounts receivable Cash Computer equipment Fees earned Rent expense

$12,000 14,000 18,000 21,000 78,000 10,000

J. Trendsetter, capital (January 1) Supplies Income taxes expense Utilities expense Wages expense Supplies expense

$10,000 1,000 1,300 8,000 25,000 1,700

Prepare an income statement, statement of owner’s equity, and a balance sheet as of December 31. ANSWER: Awesome Travel Services Income Statement For the Year Ended December 31 $78,000

Fees earned Expenses:

Wages expense

$25,000

Rent expense

10,000 Page 126

Utilities expense

8,000

Supplies expense

1,700

Income taxes expense

1,300 46,000

Total expenses

$32,000

Net income Awesome Travel Services Statement of Owner’s Equity For the Year Ended December 31 J. Trendsetter, capital, January 1 Net income for the year J. Trendsetter, capital, December 31

$10,000 32,000 $42,000

Awesome Travel Services Balance Sheet December 31 Assets

Liabilities

Cash

$18,000

Accounts receivable

14,000

Supplies

1,000

Owner’s Equity

Computer equipment Total assets

21,000

J. Trendsetter, capital

42,000

$54,000

Total liabilities and owner’s equity

$54,000

Accounts payable

$12,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.1-05 - 01 - 05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/19/2017 4:35 PM

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233. Schultz Tax Services, a tax preparation business, had the following transactions during the month of June: 1. Received cash for providing accounting services, $3,000. 2. Billed customers on account for providing services, $7,000. 3. Paid advertising expense, $800. 4. Received cash from customers on account, $3,800. 5. Owner made a withdrawal, $1,500. 6. Received telephone bill, $220. 7. Paid telephone bill, $220.

Based on the information given above, calculate the balance of cash at June 30. Use the following reconciliation. Cash, June 1

$25,000

Plus cash receipts for June

____________

Minus cash payments for June ____________ Cash, June 30

____________

ANSWER: Cash, June 1 $25,000 Plus cash receipts for June 6,800 Minus cash payments for June 2,520 Cash, June 30 $29,280 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 1:43 PM

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234. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000

Dec. 31,Year 1 $120,000 80,000

(a) Compute the ratio of liabilities to owner’s equity for each year. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? ANSWER:

(a) Dec. 31, Year 2 Total liabilities $128,250 Total owner’s equity 95,000 Ratio of liabilities to owner’s equity 1.35 ($128,250/$95,000)

Dec. 31,Year 1 $120,000 80,000 1.50 ($120,000/$80,000)

(b) Decreased POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 8:27 AM

Page 129

235. Company G has a ratio of liabilities to stockholders’ equity of 0.12 and 0.28 for Year 1 and Year 2, respectively. In contrast, Company M has a ratio of liabilities to stockholders’ equity of 1.13 and 1.29 for the same period. REQUIRED: Based on this information, which company's creditors are more at risk and why? Should the creditors of either company fear the risk of nonpayment? ANSWER:

Company M’s creditors are more at risk than are Company G’s creditors. The lower the ratio of liabilities to stockholders' equity, the better able the company is to withstand poor business conditions and pay its obligations to creditors. Without additional information, it appears that the creditors of either company are well protected against the risk of nonpayment, because the ratios are relatively low for both. However, the fact that both ratios are increasing over the period should be monitored for downturns in business conditions. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 1:43 PM

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236. The following data were taken from Miller Company’s balance sheet:

Total liabilities Total owner’s equity

Dec. 31, Year 2 $150,000 75,000

Dec. 31, Year 1 $105,000 60,000

(a) Compute the ratio of liabilities to owner’s equity. Round your answer to one decimal place. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? ANSWER:

(a) 12/31/Year 2: $150,000/$75,000 = 2.0 12/31/Year 1: $105,000/$60,000 = 1.8

(b) Increased POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:49 PM DATE MODIFIED: 1/18/2017 1:44 PM

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Chapter 2 - Analyzing Transactions True / False 1. Accounts are records of increases and decreases in individual financial statement items. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/6/2017 5:17 PM 2. A chart of accounts is a listing of accounts that make up the journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 1

Chapter 2 - Analyzing Transactions 3. The chart of accounts should be the same for each business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 4. Accounts payable are accounts that you expect will be paid to you. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - OH - FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 2

Chapter 2 - Analyzing Transactions 5. Consuming goods and services in the process of generating revenues results in expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 6. Prepaid expenses are an example of an expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 3

Chapter 2 - Analyzing Transactions 7. The unearned revenue account is an example of a liability. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:25 AM 8. The drawing account is an expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:25 AM

Page 4

Chapter 2 - Analyzing Transactions 9. Accounts in the ledger are usually maintained in alphabetical order. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 10. Depending on the account title, the right side of the account is referred to as the credit side. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 5

Chapter 2 - Analyzing Transactions 11. To determine the balance in an account, always subtract credits from debits. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 12. An account in its simplest form has three parts to it: a title, an increase side, and a decrease side. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 2 - Analyzing Transactions 13. The T account got its name because it resembles the letter “T.” a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 14. The right-hand side of a T account is known as a debit and the left-hand side is known as a credit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:26 AM

Page 7

Chapter 2 - Analyzing Transactions 15. Debiting the cash account will increase the account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 16. A credit to the cash account will increase the account. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 2 - Analyzing Transactions 17. The cash account will always be debited. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 18. The recording of cash receipts to the cash account will be done by debiting the account. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 19. The recording of cash payments from the cash account is done by entering the amount as a credit. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 20. The balance of an account can be determined by adding all of the debits, adding all of the credits, and adding the amounts together. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:27 AM

Page 10

Chapter 2 - Analyzing Transactions 21. Liabilities are debts owed by the business entity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 22. The accounts payable account is listed in the chart of accounts as an asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 11

Chapter 2 - Analyzing Transactions 23. A drawing account represents the amount of withdrawals made by the owner. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 24. Revenues are equal to the difference between cash receipts and cash payments. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 25. Expenses result from using up assets or consuming services in the process of generating revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 26. Owner’s equity will be reduced by the amount in the drawing account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 27. When an owner invests assets in the business, the capital account increases due to revenue being earned. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 28. When an account receivable is collected in cash, the total assets of the business increase. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 29. When an account payable is paid with cash, the owner's equity in the business decreases. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 30. For a month's transactions for a typical medium-sized business, the salary expense account is likely to have only credit entries. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 15

Chapter 2 - Analyzing Transactions 31. A debit is abbreviated as Db and a credit is abbreviated as Cr. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-05-Accounting Cycle ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 32. When a business receives a bill from the utility company, no entry should be made until the invoice is paid. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 33. For a month's transactions for a typical medium-sized business, the accounts payable account is likely to have only credit entries. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 17

Chapter 2 - Analyzing Transactions 35. The normal balance of revenue accounts is a credit. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 36. The normal balance of an expense account is a credit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 37. The normal balance of the drawing account is a debit. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 38. Expense accounts are increased by credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 39. The normal balance of a capital account is a debit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.2-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 40. Revenue accounts are increased by credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 41. Liability accounts are increased by debits. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 2 - Analyzing Transactions 43. Transactions are listed in the journal chronologically. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 44. Journalizing is the process of entering amounts in the ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 45. The process of recording a transaction in the journal is called journalizing. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 46. Transactions are initially entered into a record called a journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 47. The double-entry accounting system records each transaction twice. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 48. The increase side of an account is also the side of the normal balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 49. Journal entries include both debit and credit accounts for each transaction. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 50. A transaction that is recorded in the journal is called a journal entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 51. Assets are increased with debits and decreased with credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 52. Liabilities are increased with debits and decreased with credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 53. Debits will increase unearned revenues and revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 54. All owner’s equity accounts record increases to the accounts with credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 55. Journalizing always eliminates fraudulent activity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-01-Purpose ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 56. Journal entries can have more than two accounts as long as the debits equal the credits. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 57. Normal account balances are on the increase side of the accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 58. The process of transferring data from the journal to the ledger accounts is called posting. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:29 AM

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Chapter 2 - Analyzing Transactions 59. The posting reference notation used in the ledger is the account number. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:30 AM 60. The posting reference notation used in the journal is the page number. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 61. A notation in the Post. Ref. column of the general journal indicates that the amount has been posted to the ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:20 AM 62. The order of the flow of accounting data is (1) record in the ledger, (2) record in the journal, and (3) prepare the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-05-Accounting Cycle ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:32 AM

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Chapter 2 - Analyzing Transactions 63. The process of transferring the debits and credits from the journal entries to the accounts is known as posting. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 64. Postings made to standard account forms show a new balance after each entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 32

Chapter 2 - Analyzing Transactions 65. A group of related accounts that make up a complete unit is called a trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 66. A trial balance determines the accuracy of the numbers. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 33

Chapter 2 - Analyzing Transactions 67. Even when a trial balance is in balance, there may be errors in the individual accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 68. The totals at the bottom of the trial balance and the totals at the bottom of the balance sheet both show equality and balancing and therefore should be equal. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 34

Chapter 2 - Analyzing Transactions 69. A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 70. If the trial balance is in balance, it can be assumed that all journal entries were posted correctly and no errors were made. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 35

Chapter 2 - Analyzing Transactions 71. Posting a part of a transaction to the wrong account will cause the trial balance totals to be unequal. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 36

Chapter 2 - Analyzing Transactions 73. Journalizing a transaction with both the debit and the credit for $69 instead of $96 will cause the trial balance to be out of balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 74. The erroneous moving of an entire number one or more spaces to the right or left, such as writing $85 as $850, is called a transposition. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions Multiple Choice 75. Accounts a. do not reflect money amounts b. are not used by entities that manufacture products c. are records of increases and decreases in individual financial statement items d. are only used by large entities with many transactions ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-01-Purpose ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 76. Accounts are classified in the ledger a. chronologically b. alphabetically c. in accordance with their appearance in the financial statements d. with the accounts used most often listed first ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 77. Which of the following accounts is an owner's equity account? a. Cash b. Accounts Payable c. Prepaid Insurance d. Ross Morris, Capital ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 78. The gross increases in owner's equity attributable to business activities are called a. assets b. liabilities c. revenues d. expenses ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 79. A chart of accounts is a. the same as a balance sheet b. usually a listing of accounts in alphabetical order c. usually a listing of accounts in financial statement order d. used in place of a ledger ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 80. The debit side of an account a. depends on whether the account is an asset, liability, or owner's equity b. can be either side of the account depending on how the accountant set up the system c. is the right side of the account d. is the left side of the account ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 81. An account is said to have a debit balance if a. the amount of the debits exceeds the amount of the credits b. there are more entries on the debit side than on the credit side c. there are more entries on the credit side than on the debit side d. the first entry of the accounting period was posted on the debit side ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 82. Which side of the account increases the cash account? a. credit b. neither a debit nor a credit c. debit d. either a debit or a credit ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 83. Which statement(s) concerning cash is (are) true? a. Cash will always have more debits than credits. b. Cash will never have a credit balance. c. Cash is increased by debiting. d. All of these choices. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:35 AM 84. Which of the following is true about T accounts? a. The left side of a T account is called the debit side. b. The left side of a T account is called the credit side. c. The right side of a T account is called the debit side. d. Transactions are first recorded in T accounts and then posted to the journal. ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 85. A cash payment is recorded in the cash account as a. neither a debit nor a credit b. a credit c. a debit d. either a debit or a credit ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 87. In the chart of accounts, the balance sheet accounts are normally listed in which order? a. liabilities, assets, owner’s equity b. assets, liabilities, owner’s equity c. owner’s equity, assets, liabilities d. assets, owner’s equity, liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 88. In which order are the accounts listed in the chart of accounts? a. assets, expenses, liabilities, owner’s equity, revenues b. owner's equity, assets, liabilities, revenues, expenses c. assets, liabilities, owner’s equity, revenues, expenses d. assets, liabilities, revenues, expenses, owner's equity ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 89. Which are the parts of the T account? a. title, date, total b. date, debit side, credit side c. title, debit side, credit side d. title, debit side, total ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 90. The chart of accounts is designed to a. alphabetize the accounts to make reading easier for financial statement users b. organize accounts in order of dollar amount to simplify the accounting information for users c. summarize the transactions and determine ending account balances d. meet the information needs of a company's managers and other users of its financial statements ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 91. Which group of accounts is comprised of only assets? a. Cash, Accounts Payable, Buildings b. Accounts Receivable, Revenue, Cash c. Prepaid Expenses, Buildings, Patents d. Unearned Revenue, Prepaid Expenses, Cash ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:39 AM 92. Which of the following is true about assets? a. Assets include both physical and intangible items. b. Assets include only physical items. c. Assets are the personal property of the owner of the company. d. Assets are the result of selling products or services to customers. ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:42 AM

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Chapter 2 - Analyzing Transactions 93. Which of the following is not considered to be a liability? a. Wages Payable b. Accounts Receivable c. Unearned Revenue d. Accounts Payable ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:43 AM 94. Which of the following statements is not true about liabilities? a. Liabilities are debts owed to outsiders. b. Account titles of liabilities often include the term “payable.” c. Cash received before a service is performed creates a liability. d. Liabilities do not include wages owed to employees of the company. ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 95. Owner’s equity will be reduced by all of the following except a. revenues b. expenses c. withdrawals d. All of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:45 AM 96. Expenses can result from a. increasing owner’s equity b. consuming services c. using up liabilities d. purchasing assets ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 97. Assume that you are creating a chart of accounts for a company. Each account number will have two digits. The first digit indicates the major account group to which the account belongs. Which of the following correctly identifies the major account groups typically represented by the numbers 1 through 5? a. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Expenses, 5-Revenues b. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Revenues, 5-Expenses c. 1-Assets, 2-Owner’s Equity, 3-Revenues, 4-Expenses, 5-Drawing d. 1-Owner’s Equity, 2-Drawing, 3-Revenues, 4-Expenses ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 98. The accounts in the ledger of Monroe Entertainment Co. are listed below. All accounts have normal balances. Accounts Payable Accounts Receivable Prepaid Insurance Cash Drawing

$1,500 1,800 2,000 3,200 1,200

Fees Earned Insurance Expense Land Wages Expense Capital

$3,600 1,300 3,000 1,400 8,800

Total assets are a. $10,000 b. $8,000 c. $9,700 d. $9,800 ANSWER: RATIONALE:

a Total Assets = Accounts Receivable + Prepaid Insurance + Cash + Land = $1,800 + $2,000 + $3,200 + $3,000 = $10,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 8:50 AM

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Chapter 2 - Analyzing Transactions 99. The balance of an account is determined by a. adding all of the debits to all of the credits b. always subtracting the debits from the credits c. always subtracting the credits from the debits d. adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 100. Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and capital d. capital and drawing ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 101. Which of the following groups of accounts have a normal debit balance? a. revenues, liabilities, and capital b. capital and assets c. liabilities and capital d. assets and expenses ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 102. Which of the following statements is not a purpose for the journal? a. to show increases and decreases in accounts b. to show a chronological order by date c. to show a complete transaction in one place d. to help locate errors ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 103. A credit may signify a a. decrease in assets b. decrease in liabilities c. decrease in capital d. decrease in revenue ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 104. A debit signifies a decrease in a. assets b. expenses c. drawing d. revenues ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 105. Which of the following applications of the rules of debit and credit is true? a. decrease Prepaid Insurance with a credit and the normal balance is a credit b. increase Accounts Payable with a credit and the normal balance is a debit c. increase Equipment with a debit and the normal balance is a debit d. decrease Cash with a debit and the normal balance is a credit ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 106. Which of the following describes the classification and normal balance of the fees earned account? a. asset, credit b. liability, credit c. owner's equity, debit d. revenue, credit ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 107. The classification and normal balance of the accounts payable account are a. asset, credit balance b. liability, credit balance c. owner's equity, credit balance d. revenue, credit balance ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:00 AM 108. The classification and normal balance of the drawing account are a. expense, credit balance b. expense, debit balance c. liability, credit balance d. owner's equity, debit balance ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 109. Which of the following accounts are debited to record increases? a. assets and liabilities b. drawing and liabilities c. expenses and liabilities d. assets and expenses ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 110. In which of the following types of accounts are increases recorded by credits? a. revenues and liabilities b. drawing and assets c. liabilities and drawing d. expenses and liabilities ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 111. In which of the following types of accounts are decreases recorded by debits? a. assets b. liabilities c. expenses d. drawing ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 112. In which of the following types of accounts are decreases recorded by credits? a. liabilities b. owner's equity c. assets d. revenues ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 113. A credit balance in which of the following accounts would likely indicate an error? a. Fees Earned b. Salary Expense c. Janet James, Capital d. Accounts Payable ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:05 AM 114. A debit balance in which of the following accounts would likely indicate an error? a. Salaries Expense b. Notes Payable c. Edgar Martin, Drawing d. Supplies ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 115. Which of the following entries records the payment of an account payable? a. debit Cash; credit Accounts Payable b. debit Accounts Receivable; credit Cash c. debit Cash; credit Supplies Expense d. debit Accounts Payable; credit Cash ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 116. Which of the following entries records the investment of cash by Taylor Thomas, owner of a proprietorship? a. debit Taylor Thomas, Capital; credit Accounts Receivable b. debit Cash; credit Taylor Thomas, Capital c. debit Taylor Thomas, Drawing; credit Cash d. debit Cash; credit Taylor Thomas, Drawing ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 117. Which of the following entries records the payment of a bill for your insurance premium? a. debit Prepaid Insurance; credit Cash b. debit Insurance Payable; credit Accounts Receivable c. debit Accounts Payable; credit Cash d. debit Cash; credit Prepaid Insurance ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 118. Which of the following entries records the withdrawal of cash by Sally Anderson, owner of a proprietorship, for personal use? a. debit Sally Anderson, Capital; credit Cash b. debit Sally Anderson, Drawing; credit Cash c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 119. Office supplies were sold by Janer's Cleaning Service at cost to another repair shop, with cash received. Which of the following entries for Janer's Cleaning Service records this transaction? a. Office Supplies, debit; Cash, credit b. Office Supplies, debit; Accounts Payable, credit c. Cash, debit; Office Supplies, credit d. Accounts Payable, debit; Office Supplies, credit ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 120. Office supplies purchased by Janer's Cleaning Service on account were returned. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Office Supplies, credit b. Office Supplies, debit; Accounts Receivable, credit c. Accounts Payable, debit; Office Supplies, credit d. Office Supplies, debit; Accounts Payable, credit ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 121. Cash was paid by Janer's Cleaning Service to creditors on account. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Debbi Janer, Capital, credit b. Accounts Payable, debit; Cash, credit c. Accounts Receivable, debit; Cash, credit d. Accounts Payable, debit; Accounts Receivable, credit ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:24 AM 122. The process of initially recording a business transaction is called a. closing b. posting c. journalizing d. balancing ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 123. Which of the following entries records the acquisition of office supplies on account? a. Office Supplies, debit; Cash, credit b. Cash, debit; Office Supplies, credit c. Office Supplies, debit; Accounts Payable, credit d. Accounts Receivable, debit; Office Supplies, credit ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 124. Which of the following entries records the payment of insurance for the current month? a. Cash, debit; Insurance Expense, credit b. Insurance Expense, debit; Cash, credit c. Insurance Expense, debit; Accounts Receivable, credit d. Prepaid Insurance, debit; Cash, credit ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 125. Which of the following entries records the receipt of cash from clients on account? a. Accounts Payable, debit; Fees Earned, credit b. Accounts Receivable, debit; Fees Earned, credit c. Accounts Receivable, debit; Cash, credit d. Cash, debit; Accounts Receivable, credit ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 126. Which of the following entries records the collection of cash from cash customers? a. Fees Earned, debit; Cash, credit b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit d. Accounts Receivable, debit; Fees Earned, credit ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 127. Which of the following entries records the receipt of cash for two months' rent? The cash was received in advance of providing the service. a. Prepaid Rent, debit; Rent Revenue, credit b. Cash, debit; Unearned Rent, credit c. Cash, debit; Prepaid Rent, credit d. Cash, debit; Rent Expense credit ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:32 AM 128. A client has a massage and asks the company bookkeeper to mail her the bill. The bookkeeper should make which entry to record the invoice? a. no entry until the cash is received b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit d. Accounts Receivable, debit; Fees Earned, credit ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:34 AM

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Chapter 2 - Analyzing Transactions 129. Which of the following abbreviations is correct? a. Debit, “Dr”; Credit, “Cd” b. Debit, “Db”; Credit, “Cr” c. Debit, “Db”; Credit, “Cd” d. Debit, “Dr”; Credit, “Cr” ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:24 AM 130. Which of the following is not a correct rule of debits and credits? a. Assets, expenses, and withdrawals are increased by debits. b. Assets are decreased by credits and have a normal debit balance. c. Liabilities, revenues, and owner’s equity are increased by credits. d. The normal balance for revenues and expenses is a credit. ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 131. Gently Laser Clinic purchased laser equipment for $8,500 and paid $2,250 down, with the remainder to be paid later. The correct entry would be a. Equipment 2,250 Cash 2,250 b. Cash 2,250 Accounts Payable 6,250 Equipment 8,500 c. Equipment Expense 8,500 Accounts Payable 2,250 Cash 6,250 d. Equipment 8,500 Accounts Payable 6,250 Cash 2,250 ANSWER: RATIONALE:

d Equipment Accounts Payable Cash

8,500 6,250 ($8,500 – $2,250) 2,250

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 132. The ____ is where a transaction can first be found in the accounting records. a. chart of accounts b. income statement c. balance sheet d. journal ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 133. The process of recording a transaction in the journal is called a. ledgerizing b. journalizing c. posting d. summarizing ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 134. Joshua Scott invests $40,000 into his new business. How would this transaction be entered in the journal in good form? a. Cash 40,000 Joshua Scott, Capital 40,000 Invested cash in business. b. Cash 40,000 Joshua Scott, Loan 40,000 Invested cash in business. c. Joshua Scott, Capital 40,000 Cash 40,000 Invested cash in business. d. Joshua Scott, Loan 40,000 Cash 40,000 Invested cash in business. ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 135. May

Cash Scott Clark, Capital Invested cash in business.

22,000 22,000

This journal entry will a. increase Capital and decrease Cash b. increase Cash and decrease Capital c. increase Cash and increase Capital d. decrease Cash and decrease Capital ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:41 AM

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Chapter 2 - Analyzing Transactions 136. May

Land Cash Purchased land for business. What effects does this journal entry have on the accounts? a. increase Cash and increase Land b. increase Land and decrease Cash c. decrease Cash and decrease Land d. increase Cash and decrease Land

105,000 105,000

ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 137. Mar.

Accounts Payable Cash Paid creditors on account. What effects does this journal entry have on the accounts? a. decrease Accounts Payable, increase Cash b. increase Cash, decrease Accounts Payable c. increase Accounts Payable, increase Cash d. decrease Accounts Payable, decrease Cash

800 800

ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:43 AM 138. Which of the following accounts would be increased with a credit? a. Land; Accounts Payable; Drawing b. Accounts Payable; Unearned Revenue; Collins, Capital c. Collins, Capital; Accounts Receivable; Unearned Revenue d. Cash; Accounts Receivable; Collins, Capital ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 139. In accordance with the debit and credit rules, which of the following is true? a. Debits increase assets. b. Credits increase assets. c. Debits increase both assets and capital. d. Credits increase both assets and liabilities. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 140. All of the following accounts are increased with a debit except a. Unearned Revenue b. Land c. Accounts Receivable d. Cash ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 141. Which of the following owner’s equity accounts follows the same debit and credit rules as liabilities? a. expense accounts only b. drawing accounts only c. revenue accounts only d. expense and drawing accounts ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 142. The payment for the monthly rent will require which of the following entries? a. debit Cash and debit Rent Expense b. credit Cash and credit Rent Expense c. debit Rent Expense and credit Cash d. credit Rent Expense and debit Cash ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 143. Expenses follow the same debit and credit rules as a. revenues b. the drawing account c. the capital account d. liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 144. Net income will result when a. revenues (credits) > expenses (debits) b. revenues (debits) > expenses (credits) c. expenses (credits) = revenues (debits) d. revenues (credits) = expenses (debits) ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 145. Which of the following will increase owner’s equity? a. expenses > revenues b. the owner draws money for personal use c. revenues > expenses d. cash is received from customers on account ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:48 AM 146. Which of the following situations increases owner’s equity? a. Supplies are purchased on account. b. Services are provided on account. c. Cash is received from customers on account. d. Utility bill will be paid next month. ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 147. Which of the following groups of accounts is increased with a debit? a. assets, liabilities, owner’s equity b. assets, drawing, expenses c. assets, revenues, expenses d. assets, liabilities, revenues ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:50 AM 148. Which of the following groups of accounts increases with a credit? a. capital, revenues, expenses b. assets, capital, revenues c. liabilities, capital, revenues d. None of these choices ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 149. Which of the following is true regarding normal balances of accounts? a. All accounts have a normal debit balance. b. The normal balance of all accounts will have either a positive or negative balance. c. Accounts that have a normal debit balance will only have debit entries, never credit entries. d. The normal balance is on the increase side of the account. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 9:53 AM 150. Which of the following is not true with a double-entry accounting system? a. The accounting equation remains in balance. b. The sum of all debits is always equal to the sum of all credits in each journal entry. c. Each business transaction will have two debits. d. Every transaction affects at least two accounts. ANSWER: POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 151. Mar.

6 Cash 2,500 Unearned Fees ???????????? What is the best explanation for this journal entry? a. Received cash for services performed. b. Received cash for services to be performed in the future. c. Paid cash in advance for services to be performed. d. Performed services for which cash is owed.

2,500

ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:04 AM

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Chapter 2 - Analyzing Transactions 152. Apr.

Equipment 15,000 Cash 5,000 Notes Payable 10,000 ???????????? Which is the best explanation for this journal entry? a. Purchased equipment; paid cash of $5,000, with the remainder to be paid in the future. b. Purchased equipment; paid cash of $10,000, with the remainder to be received in the future. c. Purchased equipment with cash. d. Purchased equipment on account. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:06 AM 153. The process of transferring the debits and credits from the journal entries to the accounts is called a. sliding b. transposing c. journalizing d. posting ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions 154. The posting process will include the transfer of which of the following data from the journal to the ledger? a. date, amount (debit or credit) b. date, amount (debit or credit), journal page number c. amount (debit or credit), account number d. date, amount (debit or credit) account number ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:07 AM 155. The Posting Reference columns are used to trace transactions from the ledger to the journal. What will be entered in the Posting Reference column of (1) the journal and (2) the ledger? a. (1) the amount of the debit or credit and (2) the journal page number b. (1) the journal page number and (2) the date of the transaction c. (1) the journal page number and (2) the account number d. (1) the account number and (2) the journal page number ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:08 AM

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Chapter 2 - Analyzing Transactions The chart of accounts for Corning Company includes the following: Account Name

Account Number 11 13 15 21 24 31 32 41 54 56

Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Corning, Capital Corning, Drawing Fees Earned Salaries Expense Rent Expense Page 3 of the journal contains the following entry: Prepaid Insurance Cash

1,530 1,530

156. What is the posting reference that will be found in the cash account? a. 11 b. 15 c. 3 d. 13 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Corning Company LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 157. What is the posting reference that will be found in the prepaid insurance account? a. 11 b. 15 c. 3 d. 13 ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Corning Company LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 159. The chart of accounts for Miguel Company includes the following: Account Name

Account Number 11 13 15 21 24 31 32 41 54 56

Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Miguel, Capital Miguel, Drawing Fees Earned Salaries Expense Rent Expense Page 3 of the journal contains the following transaction: Cash Fees Earned

640 640

What posting references will be found in the journal entry? a. 41, 3 b. 3, 11 c. 11, 41 d. 11, 3 ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:10 AM

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Chapter 2 - Analyzing Transactions 160. The chart of accounts for Miguel Company includes the following: Account Name

Account Number 11 13 15 21 24 31 32 41 54 56

Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Miguel, Capital Miguel, Drawing Fees Earned Salaries Expense Rent Expense Page 5 of the journal contains the following transaction: Salaries Expense Cash

525 525

What is the posting reference that will be found in the salaries expense account? a. 5 b. 11 c. 54 d. 21 ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:11 AM

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Chapter 2 - Analyzing Transactions 161. Proof that the dollar amount of the debits equals the dollar amount of the credits in the ledger means a. all of the information from the journal was correctly transferred to the ledger b. all accounts have their correct balances in the ledger c. only the journal is accurate; the ledger may be incorrect d. only that the debit dollar amounts equal the credit dollar amounts ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 162. That the total dollar amount of the debits equals the total dollar amount of the credits in the ledger accounts can be verified through a(n) a. chart of accounts b. trial balance c. income statement d. balance sheet ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 10:12 AM

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Chapter 2 - Analyzing Transactions 163. Randomly listed below are the steps for preparing a trial balance: (1) Verify that the total of the Debit column equals the total of the Credit column. List the accounts from the ledger and enter their debit or credit balance in the Debit or (2) Credit column of the trial balance. List the name of the company, the title of the trial balance, and the date the trial balance (3) is prepared. (4) Total the Debit and Credit columns of the trial balance. What is the proper order of these steps? a. (3), (2), (4), (1) b. (2), (3), (4), (1) c. (3), (2), (1), (4) d. (4), (3), (2), (1) ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 164. A trial balance is prepared to a. prove that there were no errors made in recording transactions into the journal b. prove that no errors were made in posting to the ledger c. prove that each account balance is correct d. discover errors that affect the equality of debits and credits ANSWER: POINTS: DIFFICULTY:

$1,500 1,800 2,000 3,200 1,200

Fees Earned Insurance Expense Land Wages Expense Capital

$3,600 1,300 3,000 1,400 8,800

Prepare a trial balance. The total of the debits is a. $13,900 b. $11,200 c. $12,700 d. $9,700 ANSWER:

a Monroe Entertainment Co.

RATIONALE:

Trial Balance Debit Balances Accounts Payable

1,500

Accounts Receivable

1,800

Prepaid Insurance

2,000

Cash

3,200

Drawing

1,200

Credit Balances

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Chapter 2 - Analyzing Transactions Fees Earned

3,600

Insurance Expense

1,300

Land

3,000

Wages Expense

1,400

Capital

8,800 13,900

13,900

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 166. Which of the following is an internal report that will determine if debit balances equal credit balances in the ledger? a. chart of accounts b. income statement c. trial balance d. account reconciliation ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 11:41 AM

Page 89

Chapter 2 - Analyzing Transactions 167. An overpayment error was discovered in computing and paying the wages of a Jamison Tree Trimming employee. When Jamison receives cash from the employee for the amount of the overpayment, which of the following entries will Jamison make? a. Cash, debit; Wages Expense, credit b. Wages Payable, debit; Wages Expense, credit c. Wages Expense, debit; Cash, credit d. Cash, debit; Wages Payable, credit ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 11:42 AM 168. If the two totals of a trial balance are not equal, it could be due to a. failure to record a transaction b. recording the same erroneous amount for both the debit and the credit parts of a transaction c. an error in determining the account balances, such as a balance being incorrectly computed d. recording the same transaction more than once ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 90

Chapter 2 - Analyzing Transactions 169. When a transposition error is made on the trial balance, the difference between the debit and credit totals on the trial balance will be a. zero b. twice the amount of the transposition c. one-half the amount of the transposition d. divisible by 9 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 170. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? a. A transaction was not posted. b. A payment of $67 for insurance was posted as a debit of $76 to Prepaid Insurance and a credit of $76 to Cash. c. A payment of $4,450 to a creditor was posted as a debit of $4,500 to Accounts Payable and a credit of $450 to Cash. d. Cash received from customers on account was posted as a debit of $720 to Cash and a credit of $720 to Accounts Payable. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 91

Chapter 2 - Analyzing Transactions 171. Which of the following errors will cause the trial balance totals to be unequal? a. posting the debit portion of a journal entry incorrectly when the credit portion of the entry is correctly posted b. failure to record a transaction or to post a transaction c. recording the same transaction more than once d. recording the same erroneous amount for both the debit and the credit parts of a transaction ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 172. The trial balance is out of balance and the accountant suspects that a transposition or slide error has occurred. What will the accountant do to confirm this suspicion? a. Determine the amount of the error and look for that amount on the trial balance. b. Determine the amount of the error and divide by 2, then look for that amount on the trial balance. c. Determine the amount of the error and refer to the journal entries for that amount. d. Determine the amount of the error and divide by 9. If the result is evenly divided, then this type of error is likely. ANSWER: POINTS: DIFFICULTY:

Page 92

Chapter 2 - Analyzing Transactions 173. The purchase of supplies on account was recorded and posted as a debit to Supplies for $500 and a credit to Accounts Receivable for $500. The correcting entry would include a a. credit to Accounts Receivable for $500 b. credit to Accounts Receivable for $1,000 c. credit to Accounts Payable for $500 d. credit to Accounts Payable for $1,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:25 PM 174. Which of the following is not a useful step in finding errors on the trial balance? a. Determine the difference between debits and credits and look for the amount. b. Determine the difference between debits and credits and change any account to make the trial balance correct. c. Determine the difference between debits and credits, divide the amount by 2, and look for the amount. d. Determine the difference between debits and credits, divide the amount by 9, and if it divides evenly, look for a transposition or slide error. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 93

Chapter 2 - Analyzing Transactions 175. Which of the following statements regarding a horizontal analysis is false? a. A horizontal analysis is used to compare an item in a current statement with the same item in prior statements. b. A horizontal analysis can be performed on a balance sheet and income statement, but not on a statement of cash flows. c. If Fees Earned in Year 1 is $125,000 and Fees Earned in Year 2 is $143,750, a horizontal analysis will indicate a 15% increase over this period. d. When two statements are compared in horizontal analysis, the earlier statement is used as the base for computing the amount and the percent of change. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:28 PM

Page 94

Chapter 2 - Analyzing Transactions 176. McNally Industries has a condensed income statement as shown.

Sales Total operating expenses Net income

Year 2 $198,000

Year 1 $165,500

163,000

147,500

$ 35,000

$ 18,000

Using horizontal analysis, calculate the amount and percent change for sales. Round to one decimal place. a. $32,500, 19.6% b. $18,000, 10.9% c. $35,000, 17.7% d. $17,000, 9.4% ANSWER: RATIONALE:

a Change in Sales = Sales in Year 2 – Sales in Year 1 = $198,000 – $165,500 = $32,500 Percent Change in Sales = (Sales in Year 2 – Sales in Year 1)/Sales in Year 1 = ($198,000 – $165,500)/$165,500 = 19.6% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:31 PM

Page 95

Chapter 2 - Analyzing Transactions 177. Richardson Company has a condensed income statement as shown. Year 2

Year 1

Sales

$150,000

$165,500

Total operating expenses

133,000

147,500

Net income

$ 17,000

$ 18,000

Using horizontal analysis, calculate the amount and percent change for sales. Round to one decimal place. a. $(17,000), (11.3%) b. $(15,500), (10.3%) c. $(18,000), (10.9%) d. $(15,500), (9.4%) ANSWER: RATIONALE:

d Change in Sales = Sales in Year 2 – Sales in Year 1 = $150,000 – $165,500 = – $15,500 Percent Change in Sales = (Sales in Year 2 – Sales in Year 1)/Sales in Year 1 = ($150,000 – $165,500)/$165,500 = –9.4%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:35 PM

Page 96

Chapter 2 - Analyzing Transactions 178. A debit may signify a(n) a. decrease in asset accounts b. decrease in liability accounts c. increase in the capital account d. decrease in the drawing account ANSWER: POINTS: DIFFICULTY:

Page 97

Chapter 2 - Analyzing Transactions Matching Match each of the following accounts with its proper account group from the groups listed below. a. Assets b. Liabilities c. Owner's Equity d. Revenue e. Expenses DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:38 PM 179. Unearned Rent ANSWER: b POINTS: 1 180. Prepaid Insurance ANSWER: a POINTS: 1 181. Fees Earned ANSWER: d POINTS: 1 182. Patents ANSWER: a POINTS: 1 183. Chris Clark, Drawing ANSWER: c POINTS: 1

Page 98

Chapter 2 - Analyzing Transactions For each of the following accounts, indicate whether its normal balance is on the credit side or the debit side of the T account. a. Credit side b. Debit side DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - OH - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 184. John Smith, Capital ANSWER: a POINTS: 1 185. Accounts Receivable ANSWER: b POINTS: 1 186. Accounts Payable ANSWER: a POINTS: 1 187. Interest Earned ANSWER: a POINTS: 1 188. Copyrights ANSWER: b POINTS: 1 Several types of errors can be made during the journalizing and posting process. Match the following with their best description. a. Trial balance preparation errors b. Account balance errors c. Posting errors DIFFICULTY: QUESTION TYPE:

Challenging Bloom's: Remembering Matching

Page 99

Chapter 2 - Analyzing Transactions HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:39 PM 189. Balance incorrectly computed ANSWER: b POINTS: 1 190. Debit or credit posting omitted ANSWER: c POINTS: 1 191. Wrong amount posted to an account ANSWER: c POINTS: 1 192. Column incorrectly added ANSWER: a POINTS: 1 193. Balance entered on wrong side of account ANSWER: b POINTS: 1 194. Amount incorrectly entered on trial balance ANSWER: a POINTS: 1 195. Balance entered in wrong column or omitted ANSWER: a POINTS: 1 196. Debit posted as credit, or vice versa ANSWER: c POINTS: 1

Page 100

Chapter 2 - Analyzing Transactions Subjective Short Answer 197. The chart of accounts classifies the accounts to make identification of the accounts easier. Describe the numbering system businesses use in setting up the chart of accounts. ANSWER:

A chart of accounts is set up by assigning two-digit numbers to each of the accounts for use as references. The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner's equity; 4, revenue; 5, expenses. The second digit indicates the location of the account within its group. Large companies may have additional digits to accommodate a large number of accounts.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:40 PM 198. On January 1, Cassie Harris established a catering service. Listed below are accounts she would like to open in the general ledger. List the accounts in the order in which they should appear in the ledger and propose a two-digit account numbering scheme that is consistent with the rules of a proper chart of accounts. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Cash Supplies Equipment Accounts Payable Cassie Harris, Capital Wages Expense Rent Expense Truck Utilities Expense Cassie Harris, Drawing Truck Expense Prepaid Insurance Fees Earned Miscellaneous Expense Insurance Expense Notes Payable Accounts Receivable

ANSWER:

11 Cash 12 Accounts Receivable

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Chapter 2 - Analyzing Transactions 13 Supplies 14 Prepaid Insurance 15 Equipment 16 Truck 21 Accounts Payable 22 Notes Payable 31 Cassie Harris, Capital 32 Cassie Harris, Drawing 41 Fees Earned 51 Wages Expense 52 Rent Expense 53 Utilities Expense 54 Truck Expense 55 Insurance Expense 56 Miscellaneous Expense POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:40 PM 199. On January 31, the cash account balance was $96,750. During January, cash receipts totaled $305,000 and cash payments totaled $375,880. Determine the cash balance on January 1. ANSWER:

??? + $305,000 − $375,880 = $96,750 Cash balance at January 1 is $167,630 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:42 PM

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Chapter 2 - Analyzing Transactions 200. Organize the following accounts into the usual sequence of a chart of accounts. Miscellaneous Expense Accounts Payable Accounts Receivable Cash Alecia Morris, Capital Fees Earned Prepaid Rent Salaries Expense Unearned Revenue Alecia Morris, Drawing ANSWER:

Cash Accounts Receivable Prepaid Rent Accounts Payable Unearned Revenue Alecia Morris, Capital Alecia Morris, Drawing Fees Earned Salaries Expense Miscellaneous Expense POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 201. Calculate the following: (a) Determine the cash receipts for April based on the following data: Cash payments during April Cash account balance, April 1 Cash account balance, April 30

$63,000 25,500 31,750

(b) Determine the cash received from customers on account during April based on the following data: Accounts receivable account balance, April 1 Accounts receivable account balance, April 30 Fees billed to customers during April ANSWER:

$22,500 15,250 45,000

(a)

$69,250 ($31,750 + $63,000 − $25,500)

(b)

$52,250 ($22,500 + $45,000 − $15,250)

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 202. Selected accounts from the ledger of Garrison Company appear below. For each account, indicate the following: (a) In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset - A Liability - L None of the above - N

Revenue - R Expense - E

(b) In the second column, indicate the increase side of each account by inserting Dr. or Cr. Account (1) Supplies (2) Notes Receivable (3) Fees Earned Copyright Cengage Learning. Powered by Cognero.

Type of Account _______ _______ _______

Increase Side ________ ________ ________ Page 104

Chapter 2 - Analyzing Transactions (4) Garrison, Drawing (5) Accounts Payable (6) Salaries Expense (7) Garrison, Capital (8) Accounts Receivable (9) Equipment (10) Notes Payable

_______ _______ _______ _______ _______ _______ _______

________ ________ ________ ________ ________ ________ ________

Type of Account A A R N L E N A A L

ANSWER:

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:31 AM

Increase Side Dr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Dr. Cr.

203. All nine transactions for Dalton Survey Company for September, the first month of operations, are recorded in the following T accounts:

(1) (7) (9)

(4)

Cash 20,000 (3) 6,900 (5) 4,700 (6) (8)

7,500 2,600 5,500 2,000

Accounts Receivable 4,900 (9) 4,700 Supplies

Michael Dalton, Capital (1) 20,000

Michael Dalton, Drawing (8) 2,000 Fees Earned Page 105

Chapter 2 - Analyzing Transactions (3)

7,500

(4) (7)

(2)

Equipment 4,500

Operating Expenses 5,500

(5)

Accounts Payable 2,600(2)

(6)

4,900 6,900

4,500

Indicate the following for each debit and credit: (a) (b)

The type of account affected (asset, liability, capital, drawing, revenue, or expense). The effect on the account, using "+" for increase and "−" for decrease.

Present your answers in the following form:

Transaction

Account Debited Type Effect

ANSWER: Transaction (1) (2) (3) (4) (5) (6) (7) (8) (9)

Account Credited Type Effect Account Debited Type asset asset asset asset liability expense asset drawing asset

Account Credited Effect + + + + − + + + +

Type capital liability asset revenue asset asset revenue asset asset

Effect + + − + − − + − −

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:57 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions 204. On June 1, the cash account balance was $96,750. During June, cash receipts totaled $305,000 and the June 30 balance was $75,880. Determine the cash payments made during June. ANSWER:

$75,880 = $96,750 + $305,000 − ? Cash Payments = $325,870 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 12:58 PM 205. On September 1, Erika Company purchased land for $47,500 cash. Provide the journal entry for this transaction. ANSWER:

Sept. 1 Land

47,500 Cash

47,500 Purchased land for the company.

POINTS: DIFFICULTY:

Page 107

Chapter 2 - Analyzing Transactions 206. On October 10, Nickle Company purchased supplies for $1,800 on account. On October 25, Nickle Company paid the invoice. (a) Provide the journal entry for the purchase on account. (b) Provide the journal entry for the payment of the invoice. ANSWER:

(a) Oct. 10 Supplies Accounts Payable Purchased supplies on account.

(b) Oct. 25 Accounts Payable Cash Paid for supplies on account. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 1:00 PM

1,800 1,800

207. On October 17, Nickle Company purchased a building and a plot of land for $750,000. The building was valued at $500,000 while the land carried a value of $250,000. Nickle paid $300,000 down in cash and signed a note payable for the balance. Provide the journal entry for this transaction. ANSWER:

Oct. 17 Building Land Cash Notes Payable Purchased building and land with cash down payment.

500,000 250,000 300,000 450,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 1:01 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions 208. On November 1, Nickle Company made a cash payment of $200,000 on a note payable that was generated in the purchase of a building and land. Provide the journal entry for this transaction. ANSWER:

Nov. 1 Notes Payable Cash Made payment on note payable.

200,000 200,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 1:02 PM 209. On January 7, Damien Lawson invests $45,000 to initiate the operation of his business, JumpStart. Provide the journal entry for this transaction. ANSWER:

Jan. 7 Cash Damien Lawson, Capital Invest cash in JumpStart.

45,000 45,000

POINTS: DIFFICULTY:

Page 109

Chapter 2 - Analyzing Transactions 210. On January 8, Damien Lawson transfers ownership of several pieces of office equipment to his new business, JumpStart. When new, these items were worth $72,500. The fair market value of the equipment is $60,000. Journalize this transfer. ANSWER:

Jan. 8

Office Equipment Damien Lawson, Capital Invested equipment in business.

60,000 60,000

While Damien may have paid $72,500 for this equipment some time in the past, it should be transferred into the company at fair market value (FMV), $60,000. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

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Chapter 2 - Analyzing Transactions 211. On August 30, JumpStart incurred the following expenses: Payment to the landlord for August rent, $2,300 Payment to Gas & Electric Company for August bill, $525 Payment of employee wages for the last half of August, $1,750 Payment of shopping center’s parking lot cleaning fee, $275 Journalize these payments as one compound journal entry. ANSWER:

Aug. 30

Rent Expense Utilities Expense Wages Expense Maintenance Expense Cash Paid expenses.

2,300 525 1,750 275 4,850

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 1:03 PM 212. On October 30, Damien Lawson withdraws $3,330 from JumpStart for personal use. Journalize this event. ANSWER:

Oct. 30

Damien Lawson, Drawing Cash Withdrew cash for personal use.

3,330 3,330

POINTS: DIFFICULTY:

Page 111

Chapter 2 - Analyzing Transactions 213. For the following, mark a “D” if the following account normally has a debit balance and mark a “C” if the following account normally has a credit balance. _____1. Notes Payable _____2. Mortgage Payable _____3. Drawing _____4. Accounts Receivable _____5. Capital _____6. Rent Revenue _____7. Unearned Income _____8. Utility Expense _____9. Automobiles ANSWER: POINTS: DIFFICULTY:

1.C 2.C 3.D 4.D 5.C 6.C 7.C 8.D 9.D 1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 214. Several transactions are listed below, with the accounting equation stated to the right side of each. Use the following identification codes to indicate the effects of each transaction on the accounting equation. Write your answers in the space provided under the accounting equation. You need an identification code for each element of the accounting equation. An example is given before the first transaction. I-Increase

D-Decrease

NE-No Effect

Assets Example John Smith invests in his new business by giving it his personal drill press valued at $3,500. (a) Cash sales are made. (b) Equipment is purchased on credit. (c) Payment is made for the equipment purchased on credit in (b). Copyright Cengage Learning. Powered by Cognero.

Liabilities

___NE__

Owner’s Equity

__ ___

_ ____

_____

__ ___

_____ Page 112

Chapter 2 - Analyzing Transactions (d)

(e)

The company sold excess supplies to another company on credit. ________ Cash is collected from customers for accounts receivable balances. ________

________

ANSWER:

(a) (b)

(c)

(d)

(e)

Owner’s Equity

Assets

= Liabilities +

Cash sales are made.

Equipment is purchased on credit.

Payment is made for the equipment purchased on credit in (b).

NE_

The company sold excess supplies to another company on credit. ___NE___

___ NE

__ NE ___

Cash is collected from customers for accounts receivable balances. ___NE___

___ NE_

___ NE_ __

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions DATE CREATED: DATE MODIFIED:

1/16/2017 3:27 PM 1/19/2017 2:34 PM

215. Journalize the following five transactions for Nexium & Associates, Inc. Omit explanations. Mar. 1 Bills are sent to clients for services provided in February in the amount of $800. 9

Corner Office, Inc. delivers office furniture ($1,060) and office supplies ($160) to Nexium leaving an invoice for $1,220.

Payment is made to Corner Office, Inc. for the furniture and office supplies delivered on March 9.

A bill for $430 for electricity for the month of March is received and will be paid on its due date in April.

Salaries of $850 are paid to employees.

ANSWER:

Mar. 1

Accounts Receivable Service Revenue

800

9 Office Furniture Office Supplies Accounts Payable

1,060 160

15 Accounts Payable Cash

1,220

23 Electricity Expense Accounts Payable

430

31 Salaries Expense Cash

850

800

1,220

430

850

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:35 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions 216. Increases and decreases in various types of accounts are listed below. In each case, indicate by "Dr." or "Cr." (a) whether the change in the account would be recorded as a debit or a credit and (b) whether the normal balance of the account is a debit or a credit.

(1) Increase in Denice Dickenson, Capital (2) Increase in Denice Dickenson, Drawing (3) Decrease in Accounts Receivable (4) Increase in Notes Payable (5) Increase in Accounts Payable (6) Decrease in Supplies (7) Decrease in Salaries Expense (8) Increase in Accounts Receivable (9) Increase in Cash (10) Decrease in Land

ANSWER: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

(a) Recorded As ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

(b) Normal Balance _______ _______ _______ _______ _______ _______ _______ _______ _______ _______

(a) Recorded As Cr. Dr. Cr. Cr. Cr. Cr. Cr. Dr. Dr. Cr.

(b) Normal Balance Cr. Dr. Dr. Cr. Cr. Dr. Dr. Dr. Dr. Dr.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:31 AM 217. Record the following selected transactions for April in a two-column journal, identifying each entry by letter: (a)

Received $18,000 from Katie Long, owner.

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Chapter 2 - Analyzing Transactions (b) (c) (d) (e) (f) (g) (h) (i) (j)

Purchased equipment for $27,000, paying $10,000 in cash and giving a note payable for the remainder. Paid $2,300 for rent for April. Purchased $1,500 of supplies on account. Recorded $9,800 of fees earned on account. Received $7,500 in cash for fees earned. Paid $1,200 to creditors on account. Paid wages of $3,425. Received $7,900 from customers on account. Recorded owner's withdrawal of $1,875.

ANSWER:

(a) Cash Katie Long, Capital

18,000

(b) Equipment Cash Notes Payable

27,000

2,300

(d) Supplies Accounts Payable

1,500

(e) Accounts Receivable Fees Earned

9,800

(f) Cash Fees Earned

7,500

(g) Accounts Payable Cash

1,200

(h) Wages Expense Cash

3,425

(i) Cash Accounts Receivable

7,900

18,000

10,000 17,000

2,300

1,500

9,800

7,500

1,200

3,425

(j) Katie Long, Drawing 1,875 Cash POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

7,900

1,875

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Chapter 2 - Analyzing Transactions

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:27 PM 1/18/2017 10:17 PM

218. On January 12, JumpStart purchased $870 in office supplies. (a) Journalize this transaction as if JumpStart paid cash. (b) Journalize this transaction as if JumpStart placed it on account. (c) On January 18, JumpStart pays the amount due. Journalize this event. ANSWER:

(a) Jan. 12

(b) Jan. 12

Office Supplies Cash

870

Office Supplies Accounts Payable

870

Accounts Payable Cash

870

POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 219. On November 10, JumpStart provides $2,900 in services to clients. At the time of service, the clients paid $600 in cash and put the balance on account. (a) Journalize this event. (b) On November 20, JumpStart's clients paid an additional $900 on their accounts due. Journalize this event. (c) Calculate the accounts receivable balance on November 30. ANSWER:

(a) Nov. 10

(b) Nov. 20

Cash Accounts Receivable Fees Earned

600 2,300

Cash Accounts Receivable

900

2,900

900

(c) Original invoice Less cash paid upon completion Original amount on accounts receivable Less November 20 payment Accounts receivable balance

$2,900 600 $2,300 900 $1,400

POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 220. Prepare a journal entry for the purchase of a truck on April 4 for $85,700, paying $15,000 cash and the remainder on account. Omit explanation. Apr. 4

ANSWER:

Truck

85,700 Cash Accounts Payable

15,000 70,700

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:42 PM 221. Journalize the following selected transactions for January. Explanations may be omitted. Jan.

Date

1 2 3 4 5 6 7 8

Received cash from the investment made by the owner, $14,000. Received cash for providing accounting services, $9,500. Billed customers on account for providing services, $4,200. Paid advertising expense, $700. Received cash from customers on account, $2,500. Owner withdrew $1,010. Received telephone bill, $900. Paid telephone bill, $900. Description

Post. Ref.

Debit

Credit

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Chapter 2 - Analyzing Transactions

ANSWER: Date

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Description

Post. Ref.

Debit

Credit

Jan. 1 Cash Owner, Capital

14,000

2 Cash Revenues

9,500

3 Accounts Receivable Revenues

4,200

4 Advertising Expense Cash

700

5 Cash Accounts Receivable

2,500

6 Owner, Drawing Cash

1,010

7 Telephone Expense Accounts Payable

900

8 Accounts Payable Cash

900

14,000

9,500

4,200

700

2,500

1,010

900

1 Moderate Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.02-02 - 02-02

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Chapter 2 - Analyzing Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:43 PM 222. On December 1, JumpStart provides $2,800 in services to clients. (a) Journalize this event as if the clients had paid cash at the time the services were rendered. (b) Journalize this event as if the clients had placed this on account. (c) Assume that the clients paid $1,200 of the amount on account on December 30. Journalize this transaction. ANSWER:

(a)

(b) (c)

Dec. 1

Dec. 1 Dec. 30

Cash Fees Earned

2,800

Accounts Receivable Fees Earned Cash Accounts Receivable

2,800

2,800 1,200 1,200

POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 223. Analyze the following transactions as to their effect on the accounting equation. (a) (b) (c) (d) (e) (f)

The company paid $725 to a vendor for supplies purchased previously on account. The company performed $850 of services and billed the customer. The company received a utility bill for $395 and will pay it next month. The owner of the company withdrew $145 of supplies for personal use. The company paid $315 in salaries to its employees. The company collected $730 of cash from its customers on account.

Some of the possible effects of a transaction on the accounting equation are listed below (1) (2) (3) (4) (5) (6) (7) (8)

Assets, Dr.; Assets, Cr. Assets, Dr.; Owner's Equity, Cr. Assets, Dr.; Liabilities, Cr. Assets, Dr.; Revenue, Cr. Liabilities, Dr.; Assets, Cr. Drawing, Dr.; Assets, Cr. Expense, Dr.; Assets, Cr. Expense, Dr.; Liabilities, Cr.

Put the appropriate letter next to each transaction. ANSWER:

Transaction (a) (b) (c) (d) (e) (f)

Effect on Accounting Equation 5 4 8 6 7 1

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:32 AM

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Chapter 2 - Analyzing Transactions 224. Prepare a journal entry on October 12 for the fees earned on account, $14,600. Omit explanation. ANSWER:

Oct. 12

Accounts Receivable Fees Earned

14,600 14,600

POINTS: DIFFICULTY:

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Chapter 2 - Analyzing Transactions 225. Journalize the five transactions for Mirmax Rentals described below. Aug. 1 Mirmax purchases two new saws on credit at $425 each. The saws are added to Mirmax’s rental inventory. Payment is due in 30 days. 8

Mirmax accepts advance deposits for tool rentals of $125 that will be applied to the cash rental when the tools are returned.

Mirmax receives a bill from Macon Utility Company for $180. Payment is due in 30 days.

Customers are charged $1,250 by Mirmax for tool rentals. Payment is due from the customers in 30 days.

Mirmax receives $600 in payments from the customers that were billed for rentals on August 20.

ANSWER:

Aug. 1

Equipment Accounts Payable

850

Cash

125

850

Unearned Revenue 15

125

Utilities Expense Accounts Payable

180

Accounts Receivable Rental Revenue

1,250

Cash

600 Accounts Receivable

180

1,250

600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:46 PM 226. The bookkeeper for Brockton Industries prepared the following journal entries and posted the entries to the general ledger as indicated in the T accounts presented. Assume that the dollar amounts and the descriptions of the entries Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions are correct. July

7/3

Accounts Receivable Service Revenue Customers were billed for services completed.

1,000

Cash Accounts Receivable Payment is received from a customer billed for services on July 3.

500

Office Supplies Accounts Payable Purchased office supplies on credit; payment is due in 30 days.

600

Office Furniture Cash Payment is made for office furniture received on July 25.

700

Accounts Receivable 1,000

7/11

Cash 500 7/25

7/3

700

Office Supplies 7/12 600

1,000

500

600

700

Service Revenue 1,000 7/11 500 Accounts Payable 7/12 600 Office Furniture 7/25 700

Required If you assume that all journal entries have been recorded correctly, use the above information to: (1) Identify the postings to the general ledger that were made incorrectly. (2) Describe how the each incorrect posting should have been made. ANSWER:

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

(1) The bookkeeper incorrectly posted the July 3, July 11, and 12 journal entries. (2) For the July 3 journal entry, the $1,000 credit to Service Revenue should have been posted to the Service Revenue account as a credit, not as a debit. For the July 11 journal entry, the $500 credit should be posted to Accounts Receivable, not to Service Revenue. For the July 12 journal entry, the $600 credit to Accounts Payable should have been posted as a credit, not as a debit. 1 Challenging Bloom's: Applying Subjective Short Answer False

Page 125

Chapter 2 - Analyzing Transactions LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:56 PM 227. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries when recording business transactions during the month. Also, indicate the normal balance of each account. 1. 2. 3.

Fees Earned Utilities Expense Accounts Payable

4. 5. 6.

Supplies Cash Accounts Receivable

ANSWER:

1. Credit entries only, normal credit balance 2. Debit entries only, normal debit balance 3. Both debit and credit entries, normal credit balance 4. Both debit and credit entries, normal debit balance 5. Both debit and credit entries, normal debit balance 6. Both debit and credit entries, normal debit balance POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 228. On January 1, Merry Walker established a catering service. Listed below are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions that occurred during the first month of operations. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable

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Chapter 2 - Analyzing Transactions 9. 10. 11. 12. 13. 14. 15. 16.

Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense

Transactions Account(s) Debited Account(s) Credited a. Merry transferred cash from a personal bank account to an account to be used for the business. b. Paid rent for the period of January 3 to the end of the month. c. Purchased truck for $30,000 with a cash down payment of $5,000 and the remainder on a note. d. Purchased equipment on account. ANSWER:

Transactions a. b. c. d.

Account(s) Debited Account(s) Credited 1 9 13 1 6 1,7 5 8

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 2:57 PM 229. On January 1, Merry Walker established a catering service. Listed below are accounts to use for transactions (a) through (e), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operation. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4.

Cash Accounts Receivable Supplies Prepaid Insurance

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Chapter 2 - Analyzing Transactions 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Equipment Truck Notes Payable Accounts Payable Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense Insurance Expense

Transactions Account(s) Debited Account(s) Credited a. Purchased supplies for cash. b. Paid the annual premiums on property and casualty insurance. c. Received cash for a job previously recorded on account. d. Paid a creditor a portion of the amount owed for equipment previously purchased on account. e. Received cash for a completed job.

ANSWER:

Transactions a. b. c. d. e.

Account(s) Debited Account(s) Credited 3 1 4 1 1 2 8 1 1 11

POINTS: DIFFICULTY:

Page 128

Chapter 2 - Analyzing Transactions through (f), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operations. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Notes Payable Accounts Payable Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense Insurance Expense

Transactions Account(s) Debited Account(s) Credited a. Recorded jobs completed on account and sent invoices to customers. b. Received an invoice for truck expenses to be paid in February. c. Paid utilities expense d. Received cash from customers on account. e. Paid employee wages. f. Withdrew cash for personal use. ANSWER:

Transactions a. b. c. d. e. f.

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03

QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Account(s) Debited Account(s) Credited 2 11 15 8 14 1 1 2 12 1 10 1

Page 129

Chapter 2 - Analyzing Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 3:01 PM 231. Listed below are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Cash Accounts Receivable Office Supplies Land Interest Receivable Building Accumulated Depreciation—Building Depreciation Expense—Building Accounts Payable Interest Payable Insurance Payable Utilities Expense Notes Payable Prepaid Insurance Service Revenue Owner, Capital Insurance Expense Interest Expense Office Supplies Expense Unearned Service Revenue Owner, Drawing

Transactions Account(s) Debited Account(s) Credited a. Utility bill is received; payment will be made in 10 days. b. Paid the utility bill previously recorded in transaction (a). c. Bought a three-year insurance policy and paid in full. d. Received $7,000 from a contract to perform accounting services over the next two years.

ANSWER:

Transactions a. b. c. d.

Account(s) Debited 12 9 14 1

Account(s) Credited 9 1 1 20 Page 130

Chapter 2 - Analyzing Transactions

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 3:04 PM 232. The following two situations are independent of each other. 1. On June 1, the cash account balance was $45,750. During June, cash payments totaled $243,910, and the June 30 balance was $53,200. Determine the cash receipts during June and show your calculation. 2. On March 1, the supplies account balance was $1,800. During March, supplies of $2,450 were purchased, and supplies of $630 were on hand as of March 31. Determine the supplies expense for March and show your calculation. ANSWER:

1. $53,200 = $45,750 + Cash Receipts − $243,910 Cash Receipts = $251,360

2. $630 = $1,800 + $2,450 − Supplies Expense Supplies Expense = $3,620 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 3:09 PM

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Chapter 2 - Analyzing Transactions 233. Journalize the entries to correct the following errors: (a) (b)

A purchase of supplies for $500 on account was recorded and posted as a debit to Supplies for $200 and as a credit to Accounts Receivable for $200. A receipt of $2,500 from Fees Earned was recorded and posted as a debit to Fees Earned for $2,500 and a credit to Cash for $2,500.

ANSWER:

(a) Accounts Receivable Supplies

200

Supplies Accounts Payable

500

(b) Cash Fees Earned

200

500 5,000 5,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM 234. On November 30, Damien Lawson is informed by his accountant that $550 of a transaction recording the purchase of office supplies was really office equipment. Prepare the journal entry to correct this situation. ANSWER:

Nov. 30

Office Equipment Office Supplies

550 550

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/18/2017 10:17 PM

Page 132

Chapter 2 - Analyzing Transactions 235. The following errors took place in journalizing and posting transactions: a. b.

A withdrawal of $5,000 by Stan Norton, owner of the business, was recorded as a debit to Office Expense and a credit to Cash. An accounts receivable payment for $7,800 was recorded as a debit to Cash and a credit to Fees Earned.

Journalize the entries to correct the errors. Omit the explanations.

ANSWER:

Stan Norton, Drawing Office Expense

5,000

Fees Earned Accounts Receivable

7,800

5,000

7,800

POINTS: DIFFICULTY:

Page 133

Chapter 2 - Analyzing Transactions 236. For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. a. b. c.

Payment of a cash withdrawal of $6,800 was journalized and posted as a debit of $8,600 to Salaries Expense and a credit of $8,600 to Cash. A fee of $9,780 earned was debited to Accounts Receivable for $7,980 and credited to Fees Earned for $9,780. A payment of $3,000 to a creditor was posted as a credit of $3,000 to Accounts Payable and a credit of $3,000 to Cash.

a. The totals are equal. b. The totals are unequal. The credit total is higher by $1,800. c. The totals are unequal. The credit total is higher by $6,000. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 3:12 PM ANSWER:

237. Below is the unadjusted trial balance for Dawson Designs Co. Required (1) Identify the errors in the trial balance. All accounts have normal balances. (2) Prepare a corrected trial balance.

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Salaries Payable Tim Dawson, Capital Tim Dawson, Drawing

Dawson Designs Co. Unadjusted Trial Balance For the Month of January Debit Balances 23,000

Credit Balances 49,700

11,300 150,500 6,050 4,250 110,000 18,500 Page 134

Chapter 2 - Analyzing Transactions Service Revenue Salary Expense Miscellaneous Expense

236,600 98,930 424,020

ANSWER:

4,970 424,020

(1) a. The Debit column is added incorrectly; the sum is actually $289,780. b. The trial balance should be dated January 31, rather than “For the Month of January” c. The Accounts Receivable balance should be in the Debit column. d. The Accounts Payable balance should be in the Credit column. e. The Tim Dawson, Drawing balance should be in the Debit column. f. The Miscellaneous Expense balance should be in the Debit column. (2) Dawson Designs Co. Unadjusted Trial Balance January 31 Debit Balances Credit Balances Cash 23,000 Accounts Receivable 49,700 Prepaid Insurance 11,300 Equipment 150,500 Accounts Payable 6,050 Salaries Payable 4,250 Tim Dawson, Capital 110,000 Tim Dawson, Drawing 18,500 Service Revenue 236,600 Salary Expense 98,930 Miscellaneous Expense 4,970 356,900 356,900

POINTS: DIFFICULTY:

Page 135

Chapter 2 - Analyzing Transactions 238. Prepare a trial balance, listing the following accounts in proper sequence. The accounts (all normal balances) were taken from the ledger of Sophie Designs Co. on April 30. Accounts Payable Accounts Receivable Cash Sophie Dawson, Capital Sophie Dawson, Drawing Equipment Miscellaneous Expense

$ 4,100 3,450 6,700 17,800 7,500 14,500 850

Rent Expense Salary Expense Fees Earned Supplies Supplies Expense Utilities Expense

$11,500 14,000 45,425 3,125 1,700 4,000

ANSWER: Sophie Designs Co. Trial Balance April 30

Cash Accounts Receivable Supplies Equipment Accounts Payable Sophie Dawson, Capital Sophie Dawson, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

Debit Credit Balances Balances 6,700 3,450 3,125 14,500 4,100 17,800 7,500 45,425 14,000 11,500 4,000 1,700 850 67,325 67,325

POINTS: DIFFICULTY:

List the errors in the following trial balance. All accounts have normal balances.

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Chapter 2 - Analyzing Transactions (b)

What would be the new totals in the Debit and Credit columns after errors are corrected? What would be the balance of Accounts Receivable? Winslow’s Auto Body Trial Balance For Month Ending April 30 Debit Balances

Cash Accounts Receivable Supplies Equipment Prepaid Insurance Accounts Payable Thad Winslow, Capital Thad Winslow, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

ANSWER:

Credit Balances 19,475 ? 1,000

15,000 500 2,500 17,000 1,000 49,600 14,500 9,000 1,400 3,900 250 55,000 (a) (1) (2) (3) (4) (5) (6) (7) (8) (9)

81,575

In the heading, the date should be April 30; not for a period of time. The Cash balance should be a debit. The Accounts Receivable balance is missing. The Supplies balance should be a debit. The Prepaid Insurance balance should be a debit and this account should follow Accounts Receivable. The Thad Winslow, Capital balance should be a credit. The Thad Winslow, Drawing balance should be a debit. Rent Expense should be a debit. The trial balance does not balance.

(b) The new total for credits would be $69,100 ($2,500 accounts payable + $49,600 fees earned + $17,000 capital). The debits would also total $69,100. Accounts receivable would be $3,075 ($69,100 total credits − $66,025 corrected debits). POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements Copyright Cengage Learning. Powered by Cognero.

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Chapter 2 - Analyzing Transactions

DATE CREATED: DATE MODIFIED:

ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 1/16/2017 3:27 PM 2/21/2017 9:36 AM

240. Answer the following questions for each of the errors listed below, considered individually: (a) (b) (c)

Did the error cause the trial balance totals to be unequal? What is the amount of the difference between the trial balance totals (where applicable)? Which of the trial balance totals, debit or credit, is the larger (where applicable)?

Present your answers in columnar form, using the following headings: Error Totals Difference in Totals Larger of Totals (identifying number) (equal or unequal) (amount) (debit or credit) Errors: (1) A withdrawal of $3,000 cash by the owner was recorded by a debit of $3,000 to Salary Expense and a credit of $3,000 to Cash. (2) A $650 purchase of supplies on account was recorded as a debit of $1,650 to Equipment and a credit of $1,650 to Accounts Payable. (3) A purchase of equipment for $3,450 on account was not recorded. (4) An $870 receipt on account was recorded as an $870 debit to Cash and a $780 credit to Accounts Receivable. (5) A payment of $1,530 cash on account was recorded only as a credit to Cash. (6) Cash sales of $8,500 were recorded as a credit of $8,500 to Cash and a credit of $8,500 to Fees Earned. (7) The debit to record a $4,000 cash receipt on account was posted twice; the credit was posted once. (8) The credit to record a $300 cash payment on account was posted twice; the debit was posted once. (9) The debit balance of $7,400 in Accounts Receivable was recorded in the trial balance as a debit of $7,200.

ANSWER:

POINTS: DIFFICULTY:

Error (1) (2) (3) (4) (5) (6) (7) (8) (9)

Totals equal equal equal unequal unequal unequal unequal unequal unequal

Difference in Totals — — — $ 90 1,530 17,000 4,000 300 200

Larger of Totals — — — debit credit credit debit credit credit

1 Challenging

Page 138

Chapter 2 - Analyzing Transactions Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:37 AM 241. Set up T accounts for Cash; Accounts Receivable; Supplies; Accounts Payable; Clay Potter, Capital; Clay Potter, Drawing; Professional Fees; and Operating Expenses. (a)

In the T accounts, record the following transactions of Potter Pool Services for June, identifying each entry by number: (1) Potter invested $12,500 cash in the business. (2) Purchased supplies on account, $6,250. (3) Paid operating expenses, $5,500. (4) Billed clients for fees, $7,440. (5) Received cash from cash clients, $4,700. (6) Paid creditors on account, $1,400. (7) Received $3,100 from clients on account. (8) Withdrew $1,500 cash for personal use.

(b)

Prepare a trial balance as of June 30 for Potter Pool Services.

(c)

Assuming that supplies expense (which has not been recorded) amounts to $1,500 for June, determine the following: (1) Net income for the month. (2) Owner's equity as of June 30.

ANSWER:

(a) (1) (5) (7) Bal.

Cash 12,500 (3) 4,700 (6) 3,100 (8) 11,900

Accounts Receivable (4) 7,440 (7) Bal. 4,340

(2)

Supplies 6,250

Accounts Payable Copyright Cengage Learning. Powered by Cognero.

5,500 1,400 1,500

3,100

Clay Potter, Capital (1) 12,500

Clay Potter, Drawing (8) 1,500

Professional Fees (4) 7,440 (5) 4,700 Bal. 12,140 Operating Expenses Page 139

Chapter 2 - Analyzing Transactions (6)

1,400 (2) Bal.

6,250 4,850

(3)

5,500

(b) Potter Pool Services Trial Balance June 30

Cash Accounts Receivable Supplies Accounts Payable Clay Potter, Capital Clay Potter, Drawing Professional Fees Operating Expenses

Debit Credit Balances Balances 11,900 4,340 6,250 4,850 12,500 1,500 12,140 5,500 29,490 29,490

(c) (1) $5,140 ($12,140 − $5,500 − $1,500) (2) $16,140 ($12,500 + $5,140 − $1,500) POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 1/19/2017 3:31 PM Exhibit 2-1 All nine transactions for Ralston Sports Co. for September, the first month of operations, are recorded in the following T accounts:

(1) (7) (9)

Cash 25,000 (3) 11,900 (5) 9,700 (6) (8)

12,500 7,600 10,500 7,000

James Ralston, Capital (1)

25,000

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Chapter 2 - Analyzing Transactions

(4)

9,900

Accounts Receivable (9)

James Ralston, Drawing 9,700

(8)

Supplies (3)

Fees Earned

12,500

Equipment (2)

7,000

(4)

9,900

(7)

11,900

Operating Expenses

9,500

(6)

10,500

Accounts Payable (5)

7,600(2)

9,500

Page 141

Chapter 2 - Analyzing Transactions 242. Refer to Exhibit 2-1. Prepare a trial balance, listing the accounts in their proper order. ANSWER: Ralston Sports Company Trial Balance September 30 Debit Credit Balances Balances Cash 9,000 Accounts Receivable 200 Supplies 12,500 Equipment 9,500 Accounts Payable 1,900 James Ralston, Capital 25,000 James Ralston, Drawing 7,000 Fees Earned 21,800 Operating Expenses 10,500 48,700 48,700 POINTS: DIFFICULTY:

1 Moderate Bloom's Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Exhibit 2-1 LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:38 AM

Page 142

Chapter 2 - Analyzing Transactions 243. Lewis Company has a condensed income statement as shown below. Year 2 $178,400 $100,000 33,000 30,000 $163,000 $ 15,400

Sales Wages expense Rent expense Utilities expense Total operating expenses Net income

Year 1 $162,500 $ 92,500 30,000 25,000 $147,500 $ 15,000

Required Prepare a horizontal analysis of Lewis Company’s income statements. Comment on the trends, both favorable and unfavorable.

Year 1

Increase/ Decrease Amount

Percent Change

Sales

$178,400 $162,500

$15,900

9.8%

Wages expense

$100,000 $ 92,500

$ 7,500

8.1

Year 2

ANSWER:

Rent expenses

33,000

30,000

3,000

10.0

Utilities expense

30,000

25,000

5,000

20.0

Total operating expenses

$163,000 $147,500

$15,500

10.5

Net income

$ 15,400

$ 400

2.7

$ 15,000

While the trend in sales revenue is favorable, it is not sufficient enough to offset the rising expenses, resulting in a positive but small and slowing increase in net income.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:27 PM DATE MODIFIED: 2/21/2017 9:49 AM

Page 143

Chapter 2 - Analyzing Transactions 244. Nebraska Technologies has a condensed income statement as shown below. Year 2 Sales Wages expense Rent expense Utilities expense Total operating expenses Net income

Year 1 $158,400 $ 80,000 28,000 30,000 $138,000 $ 20,400

$162,500 $ 92,500 30,000 25,000 $147,500 $ 15,000

Required Prepare a horizontal analysis of Nebraska Technologies' income statements. Comment on the trends, both favorable and unfavorable.

ANSWER: Sales Wages expense Rent expense Utilities expense Total operating expenses Net income

Year 2 $158,400 $ 80,000 28,000 30,000

Increase/Decrease Percent Year 1 Amount Change $162,500 $ (4,100) (2.5)% $ 92,500 $(12,500) (13.5) 30,000 (2,000) (6.7) 25,000 5,000 20.0

$138,000 $ 20,400

$147,500 $ 15,000

$ (9,500) $ 5,400

(6.4) 36.0

The trend in sales revenue is unfavorable, but that is more than offset by the declines in operating expenses, with the exception of utilities, which increased over the period. Despite the 2.5% drop in sales, the net effect was a favorable increase in net income of 36.0%, which was in large part spurred by the drop in wages expense. POINTS: DIFFICULTY:

Page 144

Chapter 3 - The Adjusting Process True / False 1. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 2. Generally accepted accounting principles require the accrual basis of accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 3 - The Adjusting Process 3. The revenue recognition principle states that revenue should be recorded in the same period as the cash is received. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 4. The system of accounting where revenues are recorded when they are earned and expenses are recorded when they are incurred is called the cash basis of accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 3 - The Adjusting Process 5. The matching principle requires expenses be recorded in the same period that the related revenue is recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 6. For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 3 - The Adjusting Process 7. An example of deferred revenue is Unearned Rent. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 8. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 4

Chapter 3 - The Adjusting Process 9. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 10. The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the service is received. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 3 - The Adjusting Process 11. Revenues and expenses should be recorded in the same period to which they relate. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 12. The matching principle supports matching expenses with the related revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 6

Chapter 3 - The Adjusting Process 13. The updating of accounts when financial statements are prepared is called the adjusting process. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 14. Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 3 - The Adjusting Process 15. Adjusting entries affect only expense and asset accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 16. An adjusting entry would adjust revenue so it is reported when earned and not when cash is received. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 3 - The Adjusting Process 17. An adjusting entry would adjust an expense account so the expense is reported when incurred. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 18. An adjusting entry to accrue an incurred expense will affect total liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 3 - The Adjusting Process 19. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 20. Deferrals are recorded transactions that delay the recognition of an expense or revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 10

Chapter 3 - The Adjusting Process 21. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but not recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 22. Unearned revenue is a liability. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 11

Chapter 3 - The Adjusting Process 23. A company pays an employee $3,000 for a five-day workweek, Monday–Friday. The adjusting entry on December 31, which is a Wednesday, is a debit to Wages Expense of $1,800, and a credit to Wages Payable of $1,800. a. True b. False ANSWER: RATIONALE:

True Wages Expense per Day = $3,000/5 = $600 Wages Expense for 3 days = $600 × 3 = $1,800 Debit Credit Dec. 31 Wages Expense 1,800 Wages Payable 1,800

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/17/2017 8:17 AM 24. A company realizes that the last two days' revenue for the month was billed but not recorded. The adjusting entry on December 31 is a debit to Accounts Receivable and a credit to Fees Earned. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 25. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and stockholders' equity will be understated for the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 26. A company pays $36,000 for 12 months' rent on October 1, recording the prepayment as an asset. The adjusting entry on December 31 is a debit to Rent Expense of $9,000, and a credit to Prepaid Rent of $9,000. a. True b. False ANSWER: RATIONALE:

True Rent Expense per Month = $36,000/12 = $3,000 Rent Expense from October 1 to December 31 = $3,000 × 3 = $9,000 Debit Credit Dec. 31 Rent Expense 9,000 Prepaid Rent 9,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 27. A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting entry on December 31 is a debit to Unearned Subscription Revenue of $150 and a credit to Subscription Revenue of $150. a. True b. False ANSWER: RATIONALE:

True Unearned Subscription Revenue per Month = $360/12 = $30 Subscription Revenue from August 1 to December 31 = $30 × 5 = $150 Debit Credit Dec. 31 Unearned Subscription Revenue 150 Subscription Revenue 150

POINTS: DIFFICULTY:

1 Challenging Bloom’s: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 28. A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by December 31, the adjusting entry made at that time is a debit to Cash of $2,500, and a credit to Ticket Revenue of $2,500. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 29. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance applicable to future periods is $2,000. a. True b. False ANSWER: RATIONALE:

True Insurance Expense = Balance in Prepaid Insurance Account (prior to any adjustments) – Amount of Unexpired Insurance (applicable to future periods) = $6,000 – $2,000 = $4,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 30. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end of the period will be understated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 31. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is inadvertently omitted, the net income for the period will be understated. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 32. The systematic allocation of land's cost to expense is called depreciation. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 33. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 34. The balance in the accumulated depreciation account is the sum of the depreciation expense recorded in past periods. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 35. Accumulated depreciation accounts are liability accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 36. Accumulated depreciation is reported on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 37. A contra asset account for Land will normally appear on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 38. Depreciation Expense is reported on the balance sheet as an addition to the related asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 39. A company depreciates its equipment $500 a year. The adjusting entry on December 31 is a debit to Depreciation Expense of $500 and a credit to Equipment of $500. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 40. A fixed asset’s market value is reflected on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 41. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the period will be understated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM 42. Adjusting journal entries are dated on the last day of the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:52 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 43. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be overstated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 44. The financial statements are prepared from the unadjusted trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 45. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This error will be detected when the adjusted trial balance is prepared. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 46. The adjusted trial balance verifies that total debits equal total credits before the adjusting entries are prepared. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 47. Vertical analysis compares each item in a financial statement with a total amount from the same statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 48. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 49. Vertical analysis is useful for analyzing financial statement changes over time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Multiple Choice 50. The revenue recognition principle a. is not in conflict with the cash method of accounting b. determines when revenue is credited to a revenue account c. states that revenue is not recorded until the cash is received d. controls all revenue reporting for the cash basis of accounting ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 51. The matching principle a. addresses the relationship between the journal and the balance sheet b. determines whether the normal balance of an account is a debit or credit c. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance d. states that the revenues and related expenses should be reported in the same period ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 52. Using accrual accounting, revenue is recorded and reported only a. when cash is received without regard to when the services are rendered b. when the services are rendered without regard to when cash is received c. when cash is received at the time services are rendered d. if cash is received after the services are rendered ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 53. Using accrual accounting, expenses are recorded and reported only a. when they are incurred, whether or not cash is paid b. when they are incurred and paid at the same time c. if they are paid before they are incurred d. if they are paid after they are incurred ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 54. The accounting principle upon which deferrals and accruals are based is a. matching b. cost c. price-level adjustment d. conservatism ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 55. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? a. decreases the balance of an owner's equity account b. increases the balance of a liability account c. increases the balance of an asset account d. decreases the balance of an expense account ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 56. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the following describes the effect of the debit portion of the entry? a. increases the balance of a contra asset account b. increases the balance of an asset account c. decreases the balance of an owner's equity account d. increases the balance of an expense account ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 57. Prior to the adjusting process, accrued expenses have a. not yet been incurred, paid, or recorded b. been incurred, have not been paid, but have been recorded c. been incurred but not paid and not recorded d. been paid but have not yet been incurred ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 58. Prior to the adjusting process, accrued revenue has a. been earned and cash received b. been earned and not recorded as revenue c. not been earned but recorded as revenue d. not been recorded as revenue but cash has been received ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 59. Prepaid expenses have a. not yet been recorded as expenses but have been paid b. been recorded as expenses and paid c. been incurred and paid d. not yet been recorded as expenses ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 60. Deferred revenue is revenue that is a. earned and the cash has been received b. earned but the cash has not been received c. not earned and the cash has not been received d. not earned but the cash has been received ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 61. Adjusting entries are a. the same as correcting entries b. needed to bring accounts up to date and match revenue and expense c. optional under generally accepted accounting principles d. rarely needed in large companies ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 62. Adjusting entries affect at least one a. income statement account and one balance sheet account b. revenue and the dividends account c. asset and one owner’s equity account d. revenue and one owner’s equity account ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 63. The term used to describe an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is a. prepaid b. deferred c. accrued d. matched ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 64. Which of the following is not a characteristic of the accrual basis of accounting? a. Revenues and expenses are reported in the period in which cash is received or paid. b. Revenues are reported on the income statement in the period in which they are earned. c. The accrual basis of accounting supports the matching concept. d. Expenses are reported in the same period as the revenues to which they relate. ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 65. Generally accepted accounting principles require that companies use the ____ of accounting. a. cash basis b. deferral basis c. accrual basis d. account basis ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 66. The cash basis of accounting records revenues and expenses when the cash is exchanged, while the accrual basis of accounting a. records revenues when they are earned and expenses when they are paid b. records revenues and expenses when they are incurred c. records revenues when cash is received and expenses when they are incurred d. records revenues and expenses when the company needs to apply for a loan ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 67. By matching revenue earned during the accounting period to related incurred expenses, a. net income or loss will always be underestimated b. net income or loss will always be overestimated c. net income or loss will be properly reported on the income statement d. net income or loss will not be determined ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 68. Adjusting entries always include a. only income statement accounts b. only balance sheet accounts c. the cash account d. at least one income statement account and one balance sheet account ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 69. Prepaid expenses are eventually expected to become a. expenses when their future economic value expires or is used up b. revenues when services are performed c. expenses in the period when they are paid d. revenues when the liability is no longer owed ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 70. Which of the following is considered to be unearned revenue? a. theater tickets sold last month for yesterday’s performance b. theater tickets sold yesterday on credit for yesterday’s performance c. theater tickets that were not sold for the current performance d. theater tickets sold for next month’s performance ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 71. Which of the following is an example of accrued revenue? a. snow removal services that have been paid for three months in advance b. snow removal services that have been provided but have not been billed or paid c. an agreement that has been signed for snow removal services for the next three months d. snow removal services that have been provided and paid on the same day ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 72. Which of the following is considered to be an accrued expense? a. A computer technician installed the latest software updates and was paid on the same day. b. A computer technician has been paid in advance to install software updates as they become available. c. A computer technician has just signed an agreement with you regarding pricing for future work. d. A computer technician has installed the latest software updates, but you have not received an invoice or made payment. ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 73. Which of the following accounts would likely be included in an accrual adjusting entry? a. Insurance Expense b. Prepaid Rent c. Interest Expense d. Unearned Rent ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 74. Which of the following accounts would likely be included in a deferral adjusting entry? a. Interest Revenue b. Unearned Revenue c. Salaries Payable d. Accounts Receivable ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 75. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. revenue d. liability ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 76. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. dividend d. revenue ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 77. The unexpired insurance at the end of the fiscal period represents a(n) a. accrued asset b. accrued liability c. accrued expense d. deferred expense ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 78. The general term used to indicate delaying the recognition of an expense already paid or of a revenue already received is a. depreciation b. deferral c. accrual d. inventory ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 79. Which account would normally not require an adjusting entry? a. Wages Expense b. Accounts Receivable c. Accumulated Depreciation d. Cash ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 80. The account type and normal balance of Prepaid Expense would be a. revenue, credit b. expense, debit c. liability, credit d. asset, debit ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 5:11 PM

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Chapter 3 - The Adjusting Process 81. The account type and normal balance of Unearned Revenue would be a. revenue, credit b. expense, debit c. liability, credit d. asset, debit ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 82. Buster Industries pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Tuesday is a. debit Salaries Payable, $12,000; credit Cash, $12,000 b. debit Salary Expense, $12,000; credit Dividends, $12,000 c. debit Salary Expense, $12,000; credit Salaries Payable, $12,000 d. debit Dividends, $12,000; credit Cash, $12,000 ANSWER: RATIONALE:

c Salary Expense per Day = $30,000/5 = $6,000 Salary Expense for 2 Days = $6,000 × 2 = $12,000 Debit Credit Salary Expense 12,000 Salaries Payable 12,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 83. The entry to adjust the accounts for salaries accrued at the end of the accounting period is a. debit Salaries Payable; credit Cash b. debit Cash; credit Salaries Payable c. debit Salaries Payable; credit Salaries Expense d. debit Salaries Expense; credit Salaries Payable ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 84. Data for an adjusting entry described as "accrued wages, $2,020" requires a a. debit to Wages Expense and a credit to Wages Payable b. debit to Wages Payable and a credit to Wages Expense c. debit to Accounts Receivable and a credit to Wages Expense d. debit to Dividends and a credit to Wages Payable ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 85. Accrued revenues would affect _______ on the balance sheet. a. assets b. liabilities c. owner’s capital d. prepaid expenses ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 86. Accrued expenses affect ________ on the balance sheet. a. assets b. liabilities c. fixed assets d. prepaid expenses ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 87. Fees payable would appear on the balance sheet as a(n) a. asset b. liability c. fixed asset d. unearned revenue ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 88. The following adjusting journal entry found in the journal is missing an explanation. Select the best explanation for the entry. Wages Expense 4,500 Wages Payable 4,500 ???????????????? a. Record payment of wages. b. Record wages paid last month. c. Record wages paid in advance. d. Record wages expense incurred and to be paid next month. ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 89. Which of the following is an example of an accrued expense? a. salary owed but not yet paid b. fees received but not yet earned c. supplies on hand d. a two-year premium paid on a fire insurance policy ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 90. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The adjusting entry necessary at the end of the fiscal period ending on the second Wednesday of the pay period includes a a. debit to Salary Expense of $8,000 b. debit to Salaries Payable of $8,000 c. credit to Salary Expense of $16,000 d. credit to Salaries Payable of $16,000 ANSWER: RATIONALE:

d Salary Expense per Day = $20,000/10 = $2,000 Salary Expense Accrued (on the second Wednesday of the pay period) = $2,000 × 8 days = $16,000 Debit Credit Salary Expense 16,000 Salaries Payable 16,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 91. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30, and the proper adjusting entry is journalized at the end of the fiscal period (December 31). The entry for the payment of the payroll on Friday, January 10, includes a a. debit to Salary Expense of $16,000 b. debit to Salary Expense of $4,000 c. credit to Salaries Payable of $16,000 d. credit to Salaries Payable of $4,000 ANSWER: RATIONALE:

a Salary Expense per Day = $20,000/10 = $2,000 Number of Working Days (till January 10 from the previous pay day, December 27) = 2 days in December + 8 days in January = 10 days Salary Expense on January 10 = $2,000 × 8 days = $16,000 Salaries Payable = $2,000 × 2 days = $4,000 Debit Credit Jan. 10 Salary Expense 16,000 Salaries Payable 4,000 Cash 20,000

POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 92. The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which represents four months' rent paid on December 1. The adjusting entry required on December 31 is a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000 b. debit Prepaid Rent, $24,000; credit Rent Expense, $8,000 c. debit Rent Expense, $24,000; credit Prepaid Rent, $8,000 d. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000 ANSWER: RATIONALE:

a Rent Expense per Month = $32,000/4 = $8,000 Debit Credit Dec. 31 Rent Expense 8,000 Prepaid Rent 8,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 93. The balance in the office supplies account on January 1 was $7,000, supplies purchased during January were $3,000, and the supplies on hand on January 31 were $2,000. The amount to be used for the appropriate adjusting entry is a. $4,300 b. $12,000 c. $5,000 d. $8,000 ANSWER: RATIONALE:

d Amount to Be Used for Appropriate Adjusting Entry = Balance in Office Supplies Account on January 1 + Supplies Purchased During January – Supplies on Hand at January 31 = $7,000 + $3,000 – $2,000 = $8,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 94. Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30? a. debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000 b. debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000 c. debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000 d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000 ANSWER: RATIONALE:

d Insurance Expense = Prepaid Insurance Account Balance Before Adjustment – Unexpired Insurance = $14,000 – $3,000 = $11,000 Debit Credit Apr. 30 Insurance Expense 11,000 Prepaid Insurance 11,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 95. The entry to adjust for the cost of supplies used during the accounting period is a. debit Supplies Expense; credit Supplies b. debit Owner’s Equity; credit Supplies c. debit Accounts Payable; credit Supplies d. debit Supplies; credit Owner’s Equity ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 96. The supplies account had a balance of $4,400 at the beginning of the year and was debited during the year for $2,400, representing the total of supplies purchased during the year. If $400 of supplies are on hand at the end of the year, the supplies expense to be reported on the income statement for the year is a. $400 b. $2,000 c. $6,800 d. $6,400 ANSWER: RATIONALE:

d Supplies Expense (to be reported on the income statement for the year) = Balance of Supplies Account (at the beginning of the year) + Supplies Purchased (during the year) + Supplies on Hand (at the end of the year) = $4,400 + $2,400 – $400 = $6,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 97. Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is a. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 b. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500 c. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100 d. debit Prepaid Insurance, $1,800; credit Cash, $1,800 ANSWER: RATIONALE:

a Insurance Expense (per month) = $3,600/12 = $300 Insurance Expense (from July 1 to December 31) = $300 × 6 = $1,800 Debit Credit Dec.31 Insurance Expense 1,800 Prepaid Insurance 1,800

POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 98. Gracie Company made a prepaid rent payment of $2,800 on January 1. The company’s monthly rent is $700. The amount of prepaid rent that would appear on the January 31 balance sheet after adjustment is a. $2,100 b. $700 c. $2,800 d. $1,400 ANSWER: RATIONALE:

a Amount of Prepaid Rent (that would appear on the January 31 balance sheet after adjustment) = Prepaid Rent Payment (on January 1) – Rent for January = $2,800 – $700 = $2,100 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 99. The type of account and normal balance of Prepaid Insurance would be a. asset, credit b. asset, debit c. contra asset, credit d. contra asset, debit ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 100. The type of account and normal balance of Unearned Consulting Fees would be a. revenue, credit b. expense, debit c. liability, credit d. liability, debit ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 101. Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies a. still on hand b. purchased c. used d. required for the next accounting period ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 102. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a. stockholders' equity b. an asset c. a contra asset d. a liability ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 5:16 PM 103. Which of the following is an example of a prepaid expense? a. Supplies b. Accounts Receivable c. Unearned Subscription Revenue d. Unearned Fees ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 104. Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as a. an asset b. a liability c. a contra asset d. owner's equity ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 5:18 PM 105. Prepaid rent, representing rent for the next six months' occupancy, would be reported on the tenant's balance sheet as a(n) a. asset b. liability c. owner's equity account d. contra liability ANSWER: POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 106. The adjusting entry for gym memberships earned that were previously recorded in the unearned gym memberships account is a. debit Unearned Gym Memberships; credit Gym Memberships Revenue b. debit Gym Memberships Revenue; credit Unearned Gym Memberships c. debit Unearned Gym Memberships; credit Prepaid Gym Memberships d. debit Gym Memberships Expense; credit Unearned Gym Memberships ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 107. Which of the following pairs of accounts could not appear in the same adjusting entry? a. Fees Earned and Unearned Fees b. Interest Income and Interest Expense c. Rent Expense and Prepaid Rent d. Salaries Payable and Salaries Expense ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 108. The unearned rent account has a balance of $72,000. If $18,000 of the $72,000 is unearned at the end of the accounting period, the amount of the adjusting entry is a. $18,000 b. $90,000 c. $54,000 d. $36,000 ANSWER: RATIONALE:

c Amount of Adjusting Entry = Beginning Balance – Ending Balance = $72,000 – $18,000 = $54,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 109. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Unearned Revenue 7,500 Fees Earned 7,500 ???????????????? a. Record payment of fees earned. b. Record fees earned at the end of the month. c. Record fees that have not been earned at the end of the month. d. Record payment of fees to be earned. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 110. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Supplies Expense Supplies ???????????????? a. Adjust supplies inventory to actual. b. Record purchase of supplies. c. Reduce supplies expense. d. Record sale of supplies.

730 730

ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 111. What effect will this adjustment have on the accounting records? Unearned Fees Fees Earned a. increase net income b. increase revenues reported for the period c. decrease liabilities d. All of these choices

6,375 6,375

ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 112. What effect will this adjusting journal entry have on the accounting records? Supplies Expense Supplies a. increase income b. decrease net income c. decrease expenses d. increase assets

760 760

ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 113. How will the following adjusting journal entry affect the accounting equation? Unearned Subscription Revenue Subscription Revenue a. increase assets, increase revenues b. increase liabilities, increase revenues c. decrease liabilities, increase revenues d. decrease liabilities, decrease revenues

11,500 11,500

ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 114. The balance in the supplies account before adjustment at the end of the year is $6,250. The proper adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be a. debit Supplies, $1,500; credit Supplies Expense, $1,500 b. debit Supplies Expense, $4,750; credit Supplies, $4,750 c. debit Supplies Expense, $1,500; credit Supplies, $1,500 d. debit Supplies, $4,750; credit Supplies Expense, $4,750 ANSWER: RATIONALE:

b Supplies Expense (for the given year) = Balance in Supplies Account (before adjustment at the end of the year) – Amount of Supplies on Hand (at the end of the year) = $6,250 – $1,500 = $4,750 Debit Credit Supplies Expense 4,750 Supplies 4,750

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 115. For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ending December 31, what is the effect of these errors on revenues, expenses, and net income? a. Revenues are overstated by $4,200. b. Net income is overstated by $2,300. c. Expenses are overstated by $6,500. d. Expenses are understated by $3,500. ANSWER: RATIONALE:

b Revenues are understated by $4,200. Expenses are understated by $6,500 (insurance of $5,000 and supplies of $1,500). Effect on Net Income = $4,200 – $6,500 = –$2,300 Net income is overstated by $2,300.

POINTS: DIFFICULTY:

1 Moderate Bloom’s: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 116. The net income reported on the income statement is $58,000. However, adjusting entries have not been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as corrected, is a. $56,700 b. $58,000 c. $55,800 d. $54,500 ANSWER: RATIONALE:

d Net Income = Reported Net Income – Supplies Expense – Accrued Salaries Expense = $58,000 – $2,200 – $1,300 = $54,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 117. At the end of the fiscal year, the usual adjusting entry to prepaid insurance to record expired insurance was omitted. Which of the following statements is true? a. Total assets at the end of the year will be understated. b. Owner's equity at the end of the year will be understated. c. Net income for the year will be overstated. d. Insurance expense will be overstated. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:24 AM

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Chapter 3 - The Adjusting Process 118. The adjusting entry to adjust supplies was omitted at the end of the year. This would affect the income statement by having a. expenses understated and therefore net income overstated b. revenues understated and therefore net income understated c. expenses understated and therefore net income understated d. expenses overstated and therefore net income understated ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 119. The difference between the balance of a fixed asset account and the related accumulated depreciation account is termed a. historical cost b. contra asset c. book value d. market value ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 120. The adjusting entry to record the depreciation of a building for the fiscal period is a. debit Depreciation Expense; credit Building b. debit Depreciation Expense; credit Accumulated Depreciation c. debit Accumulated Depreciation; credit Depreciation Expense d. debit Building; credit Depreciation Expense ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 121. As time passes, fixed assets other than land lose their capacity to provide useful services. To account for this decrease in usefulness, the cost of fixed assets is systematically allocated to expense through a process called a. equipment allocation b. depreciation c. accumulation d. matching ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 122. Accumulated Depreciation and Depreciation Expense are classified, respectively, as a. expense, contra asset b. asset, contra liability c. revenue, asset d. contra asset, expense ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 123. What effect will the following adjusting journal entry have on the accounting records? Depreciation Expense Accumulated Depreciation a. increase net income b. increase revenues c. decrease expenses d. decrease net book value

2,150 2,150

ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 124. Which of the following is not true regarding depreciation? a. Depreciation allocates the cost of a fixed asset over its estimated life. b. Depreciation expense reflects the decrease in market value each year. c. Depreciation is an allocation not a valuation method. d. Depreciation expense does not measure changes in market value. ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 125. The net book value of a fixed asset is determined by the original cost a. less accumulated depreciation b. less market value c. less accumulated depreciation plus depreciation expense d. plus accumulated depreciation ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 126. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following is true? a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated, but the statement of owner’s equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total liabilities and total assets will be understated. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 127. Which of the accounts below would most likely appear on an adjusted trial balance but probably would not appear on the unadjusted trial balance? a. Fees Earned b. Accounts Receivable c. Unearned Fees d. Depreciation Expense ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 128. Which of the following accounting steps in the accounting process would be completed last? a. preparing the adjusted trial balance b. posting c. preparing the financial statements d. journalizing ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 129. When is the adjusted trial balance prepared? a. before adjusting journal entries are posted b. after adjusting journal entries are posted c. after the adjusting journal entries are journalized d. before the adjusting journal entries are journalized ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 130. What is the purpose of the adjusted trial balance? a. to verify that all of the adjusting entries have been posted b. to verify that the net income (loss) is correctly reported c. to verify that no adjusting journal entry has been omitted d. to verify that the debits and credits balance ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 131. All of the following statements regarding vertical analysis are true except a. vertical analysis may be prepared for several periods to analyze changes in relationships over time b. in a vertical analysis of a balance sheet, each asset item is stated as a percent of total assets c. in a vertical analysis of an income statement, each item is stated as a percent of total expenses d. major differences between a company’s vertical analysis and industry averages should be investigated ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 132. Two income statements for Toby Sam Enterprises are shown below. Toby Sam Enterprises Income Statement For the Years 2 and 1 Ending December 31 Year 2 $674,350 472,045 $202,305

Fees earned Operating expenses Operating income

Year 1 $520,600 338,390 $182,210

Prepare a vertical analysis of Toby Sam Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue? a. increased by 5% b. increased by 111% c. decreased by 5% d. decreased by 111% ANSWER: RATIONALE:

c Operating Income (as a percentage of revenue for Year 1) = $182,210/$520,600 = 35% Operating Income (as a percentage of revenue for Year 2) = $202,305/$674,350 = 30% Change in Operating Income (as a percentage of revenue from Year 1 to Year 2) = 30% – 35% = –5%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:28 AM Matching Match the type of account (a through e) with the business transactions that follow. a. Prepaid expense b. Accrued expense c. Unearned revenue d. Accrued revenue e. None of these choices Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process

DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 133. Services provided that have not been recorded. ANSWER: d POINTS: 1 134. Paid for one year’s insurance policy. ANSWER: a POINTS: 1 135. Retainer fee received from a client for future legal representation. ANSWER: c POINTS: 1 136. Annual property taxes that are paid at the end of the year. ANSWER: b POINTS: 1 137. Electric bill to be paid next month. ANSWER: b POINTS: 1 138. Paid for a six-month magazine subscription. ANSWER: a POINTS: 1 139. Received payment covering a six-month magazine subscription. ANSWER: c POINTS: 1 140. Provided tutoring for a student that will be invoiced next month. ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 141. Received six months of rental payments from a tenant. ANSWER: c POINTS: 1 142. Paid six months of rental payments to the landlord. ANSWER: a POINTS: 1 143. Annual depreciation on equipment, recorded on a monthly basis. ANSWER: a POINTS: 1 144. A contract to provide tutoring services beginning next month was signed. ANSWER: e POINTS: 1 Identify the effect (a through h) that omitting each of the following items would have on the balance sheet. a. Assets and owner's equity overstated b. Assets and owner's equity understated c. Assets overstated and owner's equity understated d. Assets understated and owner's equity overstated e. Liabilities and owner's equity overstated f. Liabilities and owner's equity understated g. Liabilities overstated and owner's equity understated h. Liabilities understated and owner's equity overstated DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:30 AM 145. No adjustment was made for supplies used up during the month. ANSWER: a POINTS: 1

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Chapter 3 - The Adjusting Process 146. Wages are paid every Friday for the five-day workweek. The month ended on Monday and no adjustment was recorded. ANSWER: h POINTS: 1 147. Interest earned on a note receivable was not recorded. ANSWER: b POINTS: 1 148. Services provided to customers on the last day of the month were not billed. ANSWER: b POINTS: 1 149. An attorney has earned half of a retainer fee that was received and recorded last month. No adjustment was recorded for the amount earned. ANSWER: g POINTS: 1 150. Property taxes are paid annually. The estimated monthly amount for the taxes was not recorded. ANSWER: h POINTS: 1 151. Depreciation on equipment was not recorded. ANSWER: a POINTS: 1 152. A tenant paid six months' rent in advance when he moved in on the first day of the month. No entry was made on the last day of the month. ANSWER: g POINTS: 1

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Chapter 3 - The Adjusting Process Subjective Short Answer 153. Explain the difference between the accrual basis of accounting and the cash basis of accounting. ANSWER:

The accrual basis of accounting reports revenues and expenses in the period in which a service has been performed or a product has been delivered, regardless of when cash was received. The cash basis of accounting reports revenues and expenses when cash is received or paid. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 154. Indicate with a Yes or No whether or not each of the following accounts would, under normal circumstances, require an adjusting entry. 1. Cash 2. Prepaid Expenses 3. Depreciation Expense 4. Accounts Payable 5. Accumulated Depreciation 6. Equipment ANSWER:

1. No 2. Yes 3. Yes 4. Yes 5. Yes 6. No POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 155. Classify the following items as: (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue. a) Fees received but not yet earned b) Fees earned but not yet received c) Paid premium on a one-year insurance policy d) Property tax owed to be paid beginning of next year ANSWER:

a. (2) unearned revenue b. (4) accrued revenue c. (1) prepaid expense d. (3) accrued expense POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 156. List the four basic types of accounts that require adjusting entries and give an example of each. ANSWER:

1. Prepaid expenses; example: prepaid insurance 2. Unearned revenues; example: an attorney’s retainer fee 3. Accrued revenues; example: unpaid interest earned on a note receivable 4. Accrued expenses; example: unpaid wages owed to employees POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 157. Under the accrual basis, some accounts in the ledger require updating at the end of the period. Discuss the three main reasons for this updating and give an example of each. ANSWER:

1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, the amount of supplies on hand on a day-to-day basis is normally not needed. 2. Some revenues and expenses are incurred as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time. 3. Some revenues and expenses may be unrecorded at the end of the accounting period. For example, a company may have provided services to customers that it has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

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Chapter 3 - The Adjusting Process 158. (a) Explain the differences between accrued revenues and unearned revenues. (b) Explain the differences between accrued expenses and prepaid expenses. (c) Give an example of each. ANSWER: (a)

(b)

(c)

Accrued revenues are revenues that have been earned but not recorded in the accounts. Unearned revenues are payments that have been received for services or goods to be provided in the future. Accrued expenses are expenses that have been incurred but not recorded in the accounts. Prepaid expenses are expenses for which payment has been made and for which economic benefits will be enjoyed in future accounting periods. Accrued revenues: unbilled services on account Unearned revenues: rental payments received by a landlord in advance Accrued expenses: unpaid wages due to employees Prepaid expenses: insurance policy purchased to cover future periods

POINTS: DIFFICULTY:

(b)

(c)

(d)

A business pays weekly salaries of $22,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the fiscal period, assuming that the fiscal period ends (1) on Tuesday or (2) on Wednesday. The balance in the prepaid insurance account before adjustment at the end of the year is $18,000. Journalize the adjusting entry required under each of the following alternatives: (1) the amount of insurance expired during the year is $5,300 or (2) the amount of unexpired insurance applicable to a future period is $2,700. On July 1 of the current year, a business pays $54,000 to the city for license taxes for the coming fiscal year. The same business is also required to pay an annual property tax at the end of the year. The estimated amount of the current year's property tax allocated to July is $4,800. (1) Journalize the two adjusting entries required to bring the accounts affected by the taxes up to date as of July 31. (2) What is the amount of tax expense for July? The estimated depreciation on equipment for the year is $32,000.

ANSWER: (a) (1) Salary Expense ($22,000/5 × 2) Copyright Cengage Learning. Powered by Cognero.

8,800 Page 80

Chapter 3 - The Adjusting Process 8,800

Salaries Payable (2) Salary Expense ($22,000/5 × 3)

13,200 13,200

Salaries Payable (b) (1) Insurance Expense

5,300 5,300

Prepaid Insurance (2) Insurance Expense ($18,000 – $2,700)

15,300 15,300

Prepaid Insurance (c) (1) Taxes Expense ($54,000/12)

4,500 4,500

Prepaid License Taxes Taxes Expense

4,800 4,800

Property Taxes Payable (2) $9,300 ($4,500 + $4,800) (d) Depreciation Expense Accumulated Depreciation— Equipment

32,000 32,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 160. Listed below are accounts to use for transactions (a) through (j), each identified by a number. Following this list are the transactions. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3.

Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment

Page 81

Chapter 3 - The Adjusting Process 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Building Owner’s Capital Cash Depreciation Expense—Office Equipment Owner’s Drawing Fees Earned Insurance Expense Insurance Payable Interest Expense Interest Payable Interest Receivable Land Notes Payable Office Supplies Office Supplies Expense Prepaid Insurance Unearned Fees Utilities Expense Utilities Payable

Transactions Account(s) Debited a. Utility bill is received; payment will be made in 10 days. b. Paid the utility bill previously recorded in transaction (a). c. Bought a three-year insurance policy and paid in full. d. Made an entry to adjust for the expired portion of the insurance premium. e. Received $7,000 from a contract to perform accounting services over the next two years. f. Made an entry to adjust for half of the services performed in (e). g. Purchased office supplies, paying part cash and charging the balance on account. h. Borrowed money from a bank and signed a note payable due in six months. i. Recorded one month’s accrued interest on the note payable. j. Depreciation is recorded on office equipment.

ANSWER:

Account(s) Credited

Transactions Account(s) Debited a. 21 b. 22 c. 19

Account(s) Credited 22 6 6 Page 82

Chapter 3 - The Adjusting Process d. e. f. g. h. i. j.

10 6 20 17 6 12 7

19 20 9 6, 1 16 13 3

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:35 AM 161. REM Consulting is completing the accounting information processing at the end of the fiscal year, December 31. The following trial balances are available. Accounts

Cash Accounts Receivable Prepaid Insurance Supplies Machines Accumulated Depreciation Wages Payable Unearned Fees Owner’s Capital Owner’s Drawing Fees Earned Wages Expense Depreciation Expense Copyright Cengage Learning. Powered by Cognero.

Unadjusted Trial Balance Debit Credit 13,000 1,500 600 3,800 30,000 12,000 6,700 24,000 4,800 25,000 14,000

Adjusted Trial Balance Debit Credit 13,000 1,800 200 3,000 30,000 17,500 900 6,500 24,000 4,800 25,500 14,900 5,500 Page 83

Chapter 3 - The Adjusting Process Supplies Expense Insurance Expense 67,700

67,700

800 400 74,400

74,400

(a) Reconstruct the adjusting entries and give a brief explanation of each. (b) What is the amount of net income?

ANSWER:

(a) Accounts Receivable

300

Fees Earned

300 Accrued fees.

Insurance Expense

400

Prepaid Insurance

400 Expired insurance.

Supplies Expense

800

Supplies

800 Supplies used ($3,800 – $3,000).

Depreciation Expense

5,500

Accumulated Depreciation

5,500

Depreciation expense. Wages Expense

900

Wages Payable

900 Accrued wages.

Unearned Fees

200

Fees Earned

200 Fees earned ($6,700 – $6,500).

(b) POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

$25,500 – $14,900 – $400 – $800 – $5,500 = $3,900

1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03

Page 84

Chapter 3 - The Adjusting Process ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 162. Zoey Bella Company has a payroll of $10,000 for a five-day workweek. Its employees are paid each Friday for the five-day workweek. Prepare the adjusting entry on December 31 assuming the year ends on Thursday. Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$10,000/5 = $2,000 per day × 4 days = $8,000 Date Dec. 31

Description

Post. Ref.

Wages Expense Wages Payable

Debit

Credit

8,000 8,000

POINTS: DIFFICULTY:

Page 85

Chapter 3 - The Adjusting Process 163. A one-year insurance policy was purchased on June 1 for $2,400. The adjusting entry on December 31 would be: Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$2,400/12 = $200 per month × 7 months = $1,400 Date

Description

Dec. 31

Insurance Expense Prepaid Insurance

Post. Ref.

Debit

Credit

1,400 1,400

POINTS: DIFFICULTY:

Page 86

Chapter 3 - The Adjusting Process 164. Depreciation on an office building is $2,800. The adjusting entry on December 31 would be: Date

Description

Post. Ref.

Debit

Credit

ANSWER: Date Dec. 31

Description Depreciation Expense Accum. Depr.—Office Building

Post. Debit Credit Ref. 2,800 2,800

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 87

Chapter 3 - The Adjusting Process 165. Gizmo Company purchased a one-year insurance policy on October 1 for $1,800. The adjusting entry on December 31 would be: Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$1,800/12 = $150 per month × 3 months = $450 Date

Description

Dec. 31

Insurance Expense Prepaid Insurance

Post. Ref.

Debit

Credit 450 450

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 166. The supplies account had a beginning balance of $1,750. Supplies purchased during the period totaled $3,500. At the end of the period before adjustment, $350 of supplies was on hand. Prepare the adjusting entry for supplies. ANSWER:

$1,750 + $3,500 − $350 = $4,900

Supplies Expense Supplies POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:37 AM

4,900 4,900

Page 88

Chapter 3 - The Adjusting Process 167. On January 1, DogMart Company purchased a two-year liability insurance policy for $22,800 cash. The purchase was recorded to Prepaid Insurance. Prepare the January 31 adjusting entry. ANSWER:

$22,800/24 = $950 per month Jan. 31 Insurance Expense

950

Prepaid Insurance

950

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 168. DogMart Company records depreciation for equipment. Depreciation for the period ending December 31 is $1,400 for office equipment and $2,650 for production equipment. Prepare the two entries to record the depreciation. ANSWER: Dec. 31 Depreciation Expense—Office Equipment

1,400

Accumulated Depreciation—Office Equipment Dec. 31 Depreciation Expense—Production Equipment Accumulated Depreciation—Production Equipment

1,400 2,650 2,650

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:40 AM Copyright Cengage Learning. Powered by Cognero.

Page 89

Chapter 3 - The Adjusting Process 169. On March 1, a business paid $3,600 for a 12-month liability insurance policy. On April 1, the business entered into a twoyear rental contract for equipment at a total cost of $18,000. Determine the following amounts: (a) Insurance expense for the month of March (b) Balance in prepaid insurance as of March 31 (c) Equipment rent expense for the month of April (d) Balance in prepaid equipment rental as of April 30 ANSWER:

(a)

$300 ($3,600/12 = $300)

(b)

$3,300 ($3,600 – $300 = $3,300)

(c)

$750 ($18,000/24 = $750)

(d)

$17,250 ($18,000 – $750 = $17,250)

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 90

Chapter 3 - The Adjusting Process 170. On January 1, Newman Company estimated its property tax to be $5,100 for the year. (a) (b) (c)

How much should the company accrue each month for property taxes? Calculate the balance in Property Tax Payable as of August 31. Prepare the adjusting journal entry for September.

ANSWER:

(a) $425 ($5,100/12) (b) $3,400 ($425 × 8) (c) Property Tax Expense

425

Property Tax Payable

425

Record property tax accrual for September. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 171. On January 1, Power House Co. prepaid the annual rent of $10,140. Prepare the journal entry to record this transaction. ANSWER:

Jan. 1

Prepaid Rent Cash Prepaid annual rent.

10,140 10,140

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM Copyright Cengage Learning. Powered by Cognero.

Page 91

Chapter 3 - The Adjusting Process 172. Record journal entries for the following transactions. (a) On December 1, $18,000 was received for a service contract to be performed from December 1 through April 30. (b) Assuming the work is performed evenly throughout the contract period, prepare the adjusting journal entry on December 31. ANSWER:

Dec. 1

18,000

Cash

18,000

Unearned Fees Dec. 31

Unearned Fees Fees Earned ($18,000/5 months = $3,600)

3,600 3,600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 173. On December 31, the balance in the office supplies account is $1,385. A physical count shows $435 worth of supplies on hand. Prepare the adjusting entry for supplies. ANSWER:

$1,385 − $435 = $950 Dec. 31

Office Supplies Expense Office Supplies

950 950

POINTS: DIFFICULTY:

Page 92

Chapter 3 - The Adjusting Process 174. Depreciation on equipment for the year is $6,300. (a) Record the journal entry if the company prepares adjustments once a year. (b) Record the journal entry if the company prepares adjustments on a monthly basis. ANSWER:

(a) Depreciation Expense Accumulated Depr.—Equipment (b) Depreciation Expense ($6,300/12) Accumulated Depr.—Equipment POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

6,300 6,300 525 525

175. The company determines that the interest expense on a note payable for the period ending December 31 is $775. This amount is payable on January 1. Prepare the journal entries required on December 31 and January 1. ANSWER:

Dec. 31

Interest Expense

775

Interest Payable Jan.

Interest Payable Cash

775 775 775

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 93

Chapter 3 - The Adjusting Process 176. On January 2, Dog Mart prepaid $30,000 rent for the year and recorded the prepayment in an asset account. Prepare the January 31 adjusting entry for rent expense. Jan. 31

ANSWER:

Rent Expense ($30,000/12)

2,500 2,500

Prepaid Rent

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM 177. The prepaid insurance account had a beginning balance of $6,600 and was debited for $2,300 for premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $4,100. ANSWER: Dec. 31

Insurance Expense Prepaid Insurance

4,800 4,800

$6,600 + $2,300 − $4,100 = $4,800 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:41 PM

Page 94

Chapter 3 - The Adjusting Process 178. The balance in the unearned fees account, before adjustment at the end of the year, is $10,250. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $3,125. ANSWER:

Unearned Fees Fees Earned

($10,250 – $3,125)

7,125 7,125

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 179. At the end of the current year, fees of $3,700 have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees. ANSWER: Accounts Receivable 3,700 Fees Earned POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

3,700

Page 95

Chapter 3 - The Adjusting Process 180. Ski Master Company pays weekly salaries of $18,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Wednesday. ANSWER: Salaries Expense [($18,000/5) × 3] Salaries Payable POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

10,800 10,800

181. The estimated amount of depreciation on equipment for the current year is $5,300. Journalize the adjusting entry to record the depreciation. Depreciation Expense Accumulated Depreciation POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM ANSWER:

5,300 5,300

Page 96

Chapter 3 - The Adjusting Process 182. On November 1, clients of Great Designs Company prepaid $4,250 for services to be provided in the future at a rate of $85 per hour. (a) Journalize the receipt of cash. (b) As of November 30, Great Designs shows that 15 hours of services have been provided on this agreement. Prepare the necessary journal entry. (c) Determine the total unearned fees in hours and dollars at November 30. ANSWER: (a) Nov. 1 Cash

4,250

Unearned Service Fees

(b) Nov. 30 Unearned Service Fees ($85 × 15)

4,250

1,275

Service Fees (c) Original prepaid fees

1,275 $4,250/$85 per hour =

50 hours

November service fees earned

1,275

15 hours

Balance of unearned service fees

$2,975

35 hours

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 183. Prepare the required entries for the following transactions: (a)

Austin Company pays daily wages of $645 (Monday–Friday). Paydays are every other Friday. Prepare the Monday, January 31 adjusting entry, assuming that the previous payday was Friday, January 21.

(b)

Prepare the journal entry to record Austin Company’s payroll on Friday, February 4.

(c)

Annual depreciation expense on the company’s fixed assets is $39,600. Prepare the

Page 97

Chapter 3 - The Adjusting Process adjusting entry to recognize depreciation for the month of January. (d)

The company’s office supplies account shows a debit balance of $3,755. A count of office supplies on hand on January 31 shows $635 worth of supplies on hand. Prepare the January 31 adjusting entry for Office Supplies.

ANSWER:

3,870

(a) Jan. 31 Wages Expense

3,870

Wages Payable ($645 × 6 days) Monday, January 24 through Friday January 28 5 days × $645 = $3,225 Monday, January 31 1 day × $645 = $645 Wages Payable for January 24 through January 31 $3,225 + $645 = $3,870 (b) Feb. 4 Wages Expense (4 × $645) Wages Payable Cash Payment of Feb. 4 payroll.

2,580 3,870

Depreciation Expense ($39,600/12) Accumulated Depreciation January depreciation.

3,300

Office Supplies Expense Office Supplies Office supplies used.

3,120

(d) Jan. 31

Account balance Less supplies on hand January expense

6,450

3,300

3,120

$3,755 635 $3,120

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM Copyright Cengage Learning. Powered by Cognero.

Page 98

Chapter 3 - The Adjusting Process DATE MODIFIED:

3/16/2017 4:42 PM

184. On December 15, Great Designs Company hired an independent contractor for a project. The contractor completed the project on December 29 and submitted an invoice for $2,425 which was due on January 15. The amount was duly paid on January 15. (a) Prepare the journal entry or entries necessary to record these transactions. (b) Explain why you prepared this/these journal entries. ANSWER:

(a)

Dec. 29

Professional Services Expense

2,425 2,425

Accounts Payable

Jan. 15

Accounts Payable Cash

2,425 2,425

(b) The first journal entry is required to record the expense of the independent contractor in the period in which the services were received. This journal entry created an expense in December’s income statement and a liability on December’s balance sheet. The second entry was to pay the contractor when the payment was due. This removed the liability by resolving it with a cash payment. This journal entry did not affect January’s income statement.

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:42 AM

Page 99

Chapter 3 - The Adjusting Process 185. On November 15, Great Designs Company purchased an advertising campaign for the month of December. Great Designs paid cash of $2,700 in advance. The advertising campaign ran in December and was completed on December 31. (a) Prepare all necessary journal entries for the advertising campaign for November and December. (b) Explain why you prepared this/these journal entries. ANSWER:

(a)

Nov. 15

Dec. 31

(b)

Prepaid Advertising Cash

2,700

Advertising Expense Prepaid Advertising

2,700

Under the matching concept, the expense should be recorded in the month of December when the advertising campaign ran, even though the cash was paid in November. Thus, the November journal entry creates an asset, prepaid advertising. The December 31 entry recognizes the advertising expense in December and eliminates the prepaid asset.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

Page 100

Chapter 3 - The Adjusting Process 186. On January 2, Safe Motorcycling Monthly received a check for $72 from a subscriber for a 12-month subscription. The January issue was mailed on January 15. Prepare the necessary entries for the month of January. ANSWER: Jan. 2

Cash

72 Unearned Subscription Revenue

Jan. 15 or 31

Unearned Subscription Revenue Subscription Revenue

6 6

The second entry can be made either on January 15 when the issue is mailed or on January 31with other adjusting entries. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 187. Prepare the December 31 adjusting entries for the following transactions. Omit explanations. 1. Fees accrued but not billed, $6,300. 2. The supplies account balance on December 31, $4,750; supplies on hand, $960. 3. Wages accrued but not paid, $2,700. 4. Depreciation of office equipment, $1,650. 5. Rent expired during year, $10,800. Date

Description

Post. Ref.

Debit

Credit

Page 101

Chapter 3 - The Adjusting Process

ANSWER: Date Dec. 31

Description Accounts Receivable

Post. Debit Credit Ref. 6,300 6,300

Revenues 31

Supplies Expense ($4,750 – $960)

3,790 3,790

Supplies 31

Wages Expense

2,700 2,700

Wages Payable 31

Depreciation Expense

1,650 1,650

Accumulated Depreciation 31

Rent Expense

10,800

Prepaid Rent

10,800

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 188. Prepare adjusting entries for the following transactions: (a)

(b) (c)

The beginning balance of the supplies account was $245. During the month the company bought additional supplies in the amount of $735. At the end of the month a physical inventory showed $343 of unused supplies. The company has a 12% note payable in the amount of $17,000 due in six months. The interest expense of $170 for the month has not been recorded. The company has two employees. The manager is paid on the fifteenth of every month for work performed during the first half of the month and on the first of the following month for the work performed during the second half of the month. His monthly salary is $5,500. The other employee is paid $650 for each five-day work week (Monday– Friday). The last day of the month fell on Thursday.

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Chapter 3 - The Adjusting Process (d) (e)

The unearned fees account shows a balance of $46,000. According to the manager 60% of that amount has been earned. At the end of the month $5,700 of services had been performed but not yet billed.

ANSWER: (a)

Supplies Expense ($245 + $735 – $343)

637

Supplies (b)

637

Interest Expense [($17,000 × 12%)/12]

170

Interest Payable (c)

Wages and Salary Expense

170 3,270

Wages and Salary Payable {($5,500/2) + [($650/5) × 4]} (d)

Unearned Fees

3,270

27,600

Fees Earned

27,600

($46,000 × 60%) (e)

Accounts Receivable Fees Earned

5,700 5,700

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:45 AM 189. Journalize the six entries to adjust the accounts at December 31. (Hint: One of the accounts was affected by two different adjusting entries).

Cash

Unadjusted Trial Balance Debit Credit Balances Balances 5,000

Adjusted Trial Balance Debit Credit Balances Balances 5,000 Page 103

Chapter 3 - The Adjusting Process Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Unearned Fees Owner's Capital Fees Earned Wages Expense Supplies Expense Insurance Expense Depreciation Expense Totals

32,000 3,600 4,000 11,000

32,600 100 1,400 11,000 1,700 2,000 3,500 22,000 75,000

8,900 22,000 69,000 44,300

46,300 3,500 2,600 1,700

99,900

104,200

ANSWER:

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Accounts Receivable Fees Earned

600

Supplies Expense Supplies

3,500

Insurance Expense Prepaid Insurance

2,600

Depreciation Expense Accumulated Depreciation

1,700

Unearned Fees Fees Earned

5,400

Wages Expense Wages Payable 1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06

2,000

600

3,500

2,600

1,700

5,400

2,000

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Chapter 3 - The Adjusting Process ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 8:47 AM 190. Bloom's Company pays biweekly salaries of $40,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assuming the next pay period begins on Monday, December 30, journalize the adjusting entry necessary at the end of the fiscal period (December 31). Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$40,000/10 days = $4,000 per day $4,000 per day × 2 days = $8,000

Date Dec. 31

Description

Post. Ref.

Salary Expense Salary Payable

Debit

Credit

8,000 8,000

POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 191. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30 and the proper adjusting entry is journalized at the end of the fiscal period (December 31). Journalize the entry for the payment of the payroll on Friday, January 10. Date

ANSWER:

Post. Ref.

Description

Debit

Credit

Accrued Salaries for December = $20,000/10 days = $2,000 per day; $2,000 per day × 2 days = $4,000 Salary Expense through January 10 = $20,000 – $4,000 = $16,000 Date Jan. 10

Description

Post. Ref.

Salary Expense Salary Payable Cash

Debit

Credit

16,000 4,000 20,000

POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 192. At January 31, the end of the first month of the year, the usual adjusting entry transferring expired insurance to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31? Also indicate whether the items in error will be overstated or understated. (a) ANSWER:

(b)

Insurance expense (or expenses) will be understated. Net income will be overstated. Prepaid insurance (or assets) will be overstated. Owner's equity will be overstated.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 193. At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated. (a) ANSWER:

(b)

Rent revenue (or revenues) will be understated. Net income will be understated. Owner’s equity at the end of the period will be understated. Unearned rent (or liabilities) will be overstated.

POINTS: DIFFICULTY:

Page 107

Chapter 3 - The Adjusting Process 194. Salaries of $6,400 are paid for a five-day week on Friday. Prepare the adjusting journal entry that is required if the month ends on Thursday. ANSWER: Salaries Expense [($6,400/5) × 4] Salaries Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

5,120 5,120

195. Accrued salaries of $600 owed to employees for December 29, 30, and 31 are not taken into consideration in preparing the financial statements for the year ended December 31. Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of December 31. Also indicate whether the items in error will be overstated or understated. (a) ANSWER:

(b)

Salary expense (or expenses) will be understated. Net income will be overstated. Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated.

POINTS: DIFFICULTY:

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Chapter 3 - The Adjusting Process 196. For the year ending December 31, Beard Clinical Supplies Co. mistakenly omitted adjusting entries for (1) $9,800 of unearned revenue that was earned, (2) earned revenue that was not billed of $10,200, and (3) accrued wages of $7,000. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income. ANSWER:

(a) Revenues were understated by $20,000 ($9,800 + $10,200). (b) Expenses were understated by $7,000. (c) Net income was understated by $13,000 ($20,000 − $7,000). POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 197. On January 1, Great Designs Company had a debit balance of $1,450 in the office supplies account. During the month, Great Designs purchased $115 and $160 of office supplies and journalized them to the asset account upon purchasing. On January 31, an inspection of the office supplies cabinet shows that only $350 of office supplies remains. Prepare the January 31 adjusting entry for office supplies. ANSWER: Jan. 31

Office Supplies Expense Office Supplies

Beginning balance Plus purchases Available Less ending balance Period expense

1,375 1,375

$1,450 $115 160

275 $1,725 350 $1,375

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process 198. For the year ending June 30, Island Clinical Services mistakenly omitted adjusting entries for (1) $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. What is the combined effect of these errors on (a) revenues, (b) expenses, and (c) net income for the year ending June 30? ANSWER:

(a) Revenues were understated by $4,200. (b) Expenses were understated by $6,500 ($1,500 + $5,000). (c) Net income was overstated by $2,300 ($6,500 − $4,200). POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

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Chapter 3 - The Adjusting Process 199. On December 31, a business estimates depreciation on equipment used during the first year of operations to be $2,900. (a) Journalize the adjusting entry required on December 31. (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31? ANSWER: (a) Depreciation Expense Accumulated Depreciation—Equipment

2,900 2,900

(b) (1) Depreciation expense would be understated. Net income would be overstated. (2) Accumulated depreciation would be understated, and total assets would be overstated. Owner's equity would be overstated.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 200. At the end of the fiscal year, the following adjusting entries were omitted: (a)

No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset account to the expense account. (b) No adjusting entry was made to record accrued fees of $525 for services provided to customers. Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, by inserting the dollar amount in the appropriate spaces. Insert "0" if the error does not affect the item. Error (a) Over- Understated stated

Error (b) Over- Understated stated

(1) Assets at Dec. 31 would be

(2) Liabilities at Dec. 31 would be

(3) Net income for the year would be

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Chapter 3 - The Adjusting Process

(4) Owner's equity at Dec. 31 would be

ANSWER:

(1) Assets at Dec. 31 would be (2) Liabilities at Dec. 31 would be

Error (a) Error (b) Over- Under- Over- Understated stated stated stated $1,750 $0 $0 $525

1,750

525

(4) Owner’s equity at Dec. 31 1,750 0 would be POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 9:07 AM

525

(3) Net income for the year would be

201. Jordon James started JJJ Consulting on January 1. The following are the account balances at the end of the first month of business, before adjusting entries were recorded: Accounts Payable Accounts Receivable Cash Consulting Revenue Equipment Owner's Capital Owner's Drawing Prepaid Rent Supplies

$ 300 750 6,300 4,925 7,000 15,000 1,375 4,000 800

Adjustment data: Supplies on hand at the end of the month, $200 Unbilled consulting revenue, $700 Rent expense for the month, $1,000 Depreciation on equipment, $90 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process

(a) Prepare the required adjusting entries, adding accounts as needed. (b) Prepare an adjusted trial balance for JJJ Consulting as of January 31.

ANSWER: (a) Supplies Expense

600 600

Supplies 700

Accounts Receivable

700

Consulting Revenue 1,000

Rent Expense

1,000

Prepaid Rent 90

Depreciation Expense

Accum. Depr.— Equipment (b) JJJ Consulting Adjusted Trial Balance January 31

Accounts

Debit Balances

Credit Balances

Cash

6,300

Accounts Receivable

1,450

Supplies

200

Prepaid Rent

3,000

Equipment

7,000

Accumulated Depreciation—Equipment

Accounts Payable

300

Owner's Capital

15,000

Owner's Drawing

1,375

Consulting Revenue Depreciation Expense Rent Expense Copyright Cengage Learning. Powered by Cognero.

5,625 90 1,000 Page 113

Chapter 3 - The Adjusting Process Supplies Expense

600

Totals

21,015

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/20/2017 9:05 AM 202. Complete the missing items in this summary of adjustments chart: PREPAID EXPENSES Examples Supplies, (a)

Examples Unearned rent, (e)

Examples Interest income

Financial Statement Impact if Adjusting Entry Is Omitted Income Statement: Revenues: No effect Expenses: Understated Net income: (b) Balance Sheet: Assets: (c) Liabilities: (d) Owner's equity: Overstated UNEARNED REVENUES

Adjusting Entry Dr. Expense Cr. Asset

(f)

Financial Statement Impact if Adjusting Entry Adjusting Entry is Omitted Income Statement: Revenues: (g) Expenses: No effect Net income: (h) Balance Sheet: Assets: (i) Liabilities: Overstated Owner's equity: (j) ACCRUED REVENUES

Adjusting Entry Dr. Asset

Financial Statement Impact if Adjusting Entry Is Omitted Income Statement:

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Chapter 3 - The Adjusting Process due on a note, (k)

Cr. Revenue

Examples

Revenues: (l) Expenses: (m) Net income: Understated Balance Sheet: Assets: (n) Liabilities: (o) Owner's equity: Understated ACCRUED EXPENSES

Adjusting Entry

Interest due on a (q) note payable, (p)

ANSWER:

Income Statement: Revenues: No effect Expenses: (r) Net income: (s) Balance Sheet: Assets: (t) Liabilities: Understated Owner's equity: (u)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u)

POINTS: DIFFICULTY: QUESTION TYPE:

Financial Statement Impact if Adjusting Entry Is Omitted

Prepaid rent or Prepaid insurance Overstated Overstated No effect Fee or magazine subscription received in advance Dr. Liability, Cr. Revenue Understated Understated No effect Understated Services performed but not yet billed Understated No effect Understated No effect Unpaid wages Dr. Expense, Cr. Liability Understated Overstated No effect Overstated

1 Challenging Bloom's: Applying Subjective Short Answer

Page 115

Chapter 3 - The Adjusting Process HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 203. For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. a) The adjustment for unearned fees of $3,260 was journalized as a debit to Accounts Payable for $3,260 and a credit to Fees Earned of $3,260. b) The adjustment for supplies expense of $425 was journalized as a debit to Supplies Expense for $542 and a credit to Supplies for $425. ANSWER: a)

The trial balance totals will still be equal, but the balances of Unearned Fees and Accounts Payable will be incorrect as the debit should have been made to Unearned Fees instead of Accounts Payable. The debit total exceeds the credit total by $117.

b) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

204. Using the following account balances for Garry’s Tree Service, prepare a trial balance. Cash Supplies Accounts Payable Owner's Capital Wages Expense Machinery Wages Payable Service Revenue Rent Expense Unearned Revenue Accumulated Depreciation—Machinery Prepaid Rent Copyright Cengage Learning. Powered by Cognero.

$25,000 1,000 7,000 32,910 2,000 18,350 3,600 21,000 11,500 1,500 7,340 12,200 Page 116

Chapter 3 - The Adjusting Process Owner's Drawing

3,300

ANSWER:

Cash Supplies Prepaid Rent Machinery Accumulated Depreciation—Machinery Accounts Payable Wages Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Wage Expense Rent Expense

Debit Credit Balances Balances 25,000 1,000 12,200 18,350 7,340 7,000 3,600 1,500 32,910 3,300 21,000 2,000 11,500 73,350 73,350

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

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Chapter 3 - The Adjusting Process 205. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The entry for $975 of supplies used during the period was journalized as a debit to Supplies Expense for $795 and credit to Supplies for $975. ANSWER: POINTS: DIFFICULTY:

The total will be unequal with a credit total higher by $180 ($975 − $795). 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 206. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The adjustment for accrued fees of $1,170 was journalized as a debit to Accounts Receivable for $1,170 and a credit to Fees Earned for $1,107. ANSWER: POINTS: DIFFICULTY:

The total will be unequal with a debit total higher by $63 ($1,170 − $1,107). 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

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Chapter 3 - The Adjusting Process 207. What is the purpose of an adjusted trial balance? What type(s) of error does it detect? What type(s) of error does it not detect? ANSWER:

The purpose of an adjusted trial balance is to make sure that debits equal credits before financial statements are prepared. If a debit is incorrectly posted as a credit or vice versa, the error will be detected. Likewise, if the debit(s) and credit(s) for a posted transaction do not equal, that error will be detected. Errors that will not be detected include omitting a required adjusting entry or posting a debit or credit for the correct amount to the wrong account. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM

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Chapter 3 - The Adjusting Process 208. Two income statements for Midnight Enterprises are shown below. Midnight Enterprises Income Statements For the Years Ended December 31 Year 2 $674,350 472,045 $202,305

Fees earned Operating expenses Operating income

Year 1 $520,600 338,390 $182,210

(a) Prepare a vertical analysis of Midnight Enterprises’ income statements. (b) Does the vertical analysis indicate a favorable or unfavorable trend? ANSWER:

(a) Midnight Enterprises Income Statements For the Years Ended December 31

Fees earned Operating expenses Operating income

Year 2 Amount Percent $674,350 100% 472,045 70% 30% $202,305

Year 1 Amount Percent $520,600 100% 338,390 65% $182,210

35%

(b) The vertical analysis is indicating an unfavorable trend from Year 1 to Year 2 as the operating expenses of the company as a percent of revenues have increased and operating income has decreased. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/16/2017 4:42 PM 209. Two income statements for Danielle’s Design Services are shown below. Danielle’s Design Services Income Statements For the Years Ending December 31 Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process

Fees earned Expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total expenses Operating income

Year 2 $765,340

Year 1 $696,520

$254,000 120,000 76,500 11,680 $462,180 $303,160

$214,600 108,000 98,715 16,420 $437,735 $258,785

(a) Prepare a vertical analysis of Danielle’s Design Services income statements. (b) What types of trends are indicated: favorable or unfavorable? (c) What other information would enhance the analysis?

ANSWER:

(a) Danielle’s Design Services Income Statements For the Years Ending December 31

Year 2

Year 1

Amount Percent Fees earned

Amount

Percent

$765,340

100.0%

$696,520

100.0%

Wages expense

$254,000

33.2%

$214,600

30.8%

Rent expense

120,000

15.7%

108,000

15.5%

Supplies expense

76,500

10.0%

98,715

14.2%

Miscellaneous expense

11,680

1.5%

16,420

2.4%

$462,180 Operating income $303,160 *Differences due to rounding

60.4% 39.6%

$437,735 $258,785

62.9%* 37.1%*

Expenses:

Total expenses

(b) The vertical analysis shows both favorable and unfavorable trends. The increase in wages expense of 2.4% (33.2% − 30.8%) is unfavorable. The decreases in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable—an increase in operating income as a percentage of fees earned from 37.1% to 39.6%. (c) The analysis could be enhanced by comparisons with industry averages. Copyright Cengage Learning. Powered by Cognero.

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Chapter 3 - The Adjusting Process POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 4:53 PM DATE MODIFIED: 3/17/2017 9:23 AM

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Chapter 4 - Completing the Accounting Cycle True / False 1. Cross-referencing is useful in assuring that the debits and credits are in balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 2. When accounts do not appear on the unadjusted trial balance but are needed to post adjustments, they are simply added to the Account Title column. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 3. Once the adjusted trial balance is in balance, the flow of accounts will now go into the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 4. There is really no benefit in preparing financial statements in any particular order. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 5. On the income statement, miscellaneous expenses are usually presented as the last item without regard to the dollar amount. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 6. The usual presentation of the statement of owner's equity is (1) Beginning capital, (2) Net income or loss, (3) Drawing, (4) Owner's contributions, and (5) Ending capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 2:42 PM

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Chapter 4 - Completing the Accounting Cycle 7. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 8. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 9. Prepaid Insurance is an example of a current asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 10. Land is an example of a plant asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 11. Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 12. The amount of the net income for a period appears on both the income statement and the balance sheet for that period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 13. Accrued taxes payable are generally reported on the balance sheet as a current liability. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 14. Office Equipment is an example of a current asset account. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 15. Capital and drawing are reported in the owner's equity section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 16. Deferred expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 17. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 18. Accrued expenses are ordinarily listed on the balance sheet as current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 19. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 20. Examples of temporary accounts are supplies and prepaid expenses which are in the ledger for just a short time before they expire. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 21. Accumulated Depreciation is a permanent account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 22. The drawing account is a temporary account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 23. The balance sheet accounts are referred to as real or permanent accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 24. Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 25. Net income is closed to the owner's capital account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 3:05 PM 26. The accumulated depreciation account is closed to the drawing account. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 27. The drawing account is debited in the closing entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 7:40 AM 28. The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 29. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 30. Journalizing and posting closing entries must be completed before financial statements can be prepared. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 31. During the closing process, some balance sheet accounts are closed and end the period with a zero balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 32. Closing entries are entered directly on to the work sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 33. The post-closing trial balance will generally have fewer accounts than the trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 34. A post-closing trial balance contains only asset and liability accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 35. A post-closing trial balance should be prepared before the financial statements are prepared. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 36. Assets, liabilities, and owner’s capital are real accounts and do not get closed at the end of the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 37. All income statement accounts will be closed at the end of the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 38. Accounts reported on the balance sheet that are carried forward from year to year are known as permanent accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 39. Balance sheet accounts are not considered real accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 40. Real accounts are not permanent accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 41. It is not necessary to post the closing entries to the general ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 42. The closing process is sometimes referred to as closing the books. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 43. Once an account has been closed for the period, inserting a line in the balance columns zeros out the account, making it ready for the following period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 44. After analyzing transactions, the next step would be to post the transactions in the ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 45. The last step of the accounting cycle is to prepare a post-closing trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 46. The most important output of the accounting cycle is the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 47. The accounting cycle begins with preparing an unadjusted trial balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 48. Financial statements should be prepared before the closing entries are journalized and posted. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 49. The unadjusted, adjusted, and final trial balances are prepared during the accounting cycle of a period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 50. Any 12-month accounting period adopted by a company is known as its fiscal year. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 7:45 AM

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Chapter 4 - Completing the Accounting Cycle 51. A fiscal year that ends when business activities have reached their lowest point is called the natural business year. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 53. The majority of businesses end their fiscal year on December 31. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 55. The ability of a business to pay its debts is called solvency. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 7:48 AM DATE MODIFIED: 1/24/2017 7:51 AM 56. Working capital is the excess of the current liabilities of a business over its current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 57. The current ratio is computed by dividing current liabilities by current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 7:49 AM DATE MODIFIED: 1/24/2017 7:53 AM 58. The current ratio is more useful than working capital in making comparisons across companies. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 59. Current assets and current liabilities for Brayden Company are as follows:

Current Assets Current Liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

The change in the current ratio from 20Y8 to 20Y9 was favorable. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 7:49 AM DATE MODIFIED: 1/24/2017 7:57 AM

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Chapter 4 - Completing the Accounting Cycle 60. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

The change in working capital from 20Y8 to 20Y9 indicates that Brayden will no longer be solvent. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 7:58 AM DATE MODIFIED: 2/21/2017 12:03 PM 61. The income statement is prepared from the adjusted trial balance or the Income Statement columns on the work sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 62. The balances of the capital accounts from the Adjusted Trial Balance columns of the work sheet are extended to the Statement of Owner’s Equity columns. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:08 AM 63. The work sheet is not considered a part of the formal accounting records. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 64. The work sheet is a working paper that accountants can use to summarize adjusting entries and the account balances for the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 65. The trial balance may be listed on the work sheet instead of being prepared separately. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 66. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 67. A work sheet heading is dated for a period of time. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 68. On the work sheet, the capital and drawing account balances are extended to the Balance Sheet columns. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 69. After the account balances have been extended from the Adjusted Trial Balance columns on the work sheet, the difference between the initial totals of the Balance Sheet Debit and Credit columns is net income or net loss. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 70. After net income or loss is entered on the work sheet, the Debit column total must equal the Credit column total for the Balance Sheet pair of columns. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:17 AM 71. A net loss is shown on the work sheet in the Credit columns of both the Income Statement columns and the Balance Sheet columns. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 72. Net income is shown on the work sheet in the Income Statement Debit column and the Balance Sheet Credit column. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:20 AM 73. If the totals of the Income Statement Debit and Credit columns of a work sheet are $27,000 and $29,000, respectively, after all account balances have been extended, the amount of the net loss is $2,000. a. True b. False ANSWER: RATIONALE:

False As the Income Statement Credit column total (total revenue) is greater than the Income Statement Debit column total (total expenses), the difference is the net income. Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $29,000 – $27,000 = $2,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 74. The balance in the capital account on the worksheet will equal the amount presented in the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 75. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 76. The chart of accounts, the journal, and the ledger are essential parts of the accounting system. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 77. A reversing entry reverses the effects of an adjusting entry from the previous period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 8:26 AM DATE MODIFIED: 1/24/2017 8:27 AM

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Chapter 4 - Completing the Accounting Cycle 78. Reversing entries are recorded after adjusting entries have been recorded and before closing entries are recorded for the same period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 8:29 AM DATE MODIFIED: 1/24/2017 8:30 AM 79. Accrued fees earned are recorded during the adjusting process. The reversing entry will leave a debit balance in Fees Earned as of the first day of the next period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 8:31 AM DATE MODIFIED: 1/24/2017 8:32 AM

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Chapter 4 - Completing the Accounting Cycle Multiple Choice 80. What is the major difference between the unadjusted trial balance and the adjusted trial balance? a. The adjusted trial balance will show the net income (loss) as an additional account. b. Unlike the adjusted trial balance, the unadjusted trial balance will continue with the end-of-period processing even if it is not in balance. c. The adjusted trial balance includes the postings of the adjustments for the period in the balance of the accounts. d. The adjusted trial balance will be used to record the adjustments for the period. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 81. When preparing the statement of owner's equity, the beginning capital balance can always be found a. in the Income Statement columns of the work sheet b. in the statement of cash flows c. in the general ledger d. in the Balance Sheet columns of the work sheet ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 82. Accumulated Depreciation appears on the a. balance sheet in the current assets section b. balance sheet in the property, plant, and equipment section c. balance sheet in the long-term liabilities section d. income statement as an operating expense ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 83. Notes receivable due in 390 days appear on the a. balance sheet in the current assets section b. balance sheet in the noncurrent assets section c. balance sheet in the current liabilities section d. income statement as an expense ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 84. Unearned fees appear on the a. balance sheet in the current assets section b. balance sheet as a current liability c. balance sheet in the owner's equity section d. income statement as revenue ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:34 AM 85. Which one of the fixed asset accounts listed below will not have a related contra asset account? a. Office Equipment b. Land c. Delivery Equipment d. Building ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 86. Prepaid insurance is reported on the balance sheet as a a. current asset b. fixed asset c. current liability d. long-term liability ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 87. The first item appearing on the statement of owner's equity is a. net income b. the ending balance of owner's equity c. owner withdrawals d. the beginning balance of owner's equity ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 88. The statement of owner’s equity should be prepared a. before the income statement and after the balance sheet b. before the income statement and balance sheet c. after the income statement and balance sheet d. after the income statement and before the balance sheet ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 89. The income statement should be prepared a. before the statement of owner’s equity and balance sheet b. after the statement of owner’s equity and before the balance sheet c. after the statement of owner’s equity and balance sheet d. after the balance sheet and before the statement of owner’s equity ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance December 31 Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle

Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable Bob Steely, Capital Bob Steely, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Totals

Account No. 11 12 13 18 19 21 22 31 32 41 51 52 53 54 59

Debit Credit Balances Balances 6,530 2,100 700 13,700 1,100 1,900 4,300 12,940 790 9,250 2,500 1,960 775 250 185 29,490 29,490

90. Use the adjusted trial balance for Stockton Company. Determine the net income (loss) for the period. a. Net income is $9,250. b. Net loss is $790. c. Net loss is $5,670. d. Net income is $3,580. ANSWER: RATIONALE:

d Net Income = Fees Earned – (Wages Expense + Rent Expense + Utilities Expense + Depreciation Expense + Miscellaneous Expense) = $9,250 – ($2,500 + $1,960 + $775 + $250 + $185) = $3,580 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stockton Company LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:03 PM

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Chapter 4 - Completing the Accounting Cycle 91. Use the adjusted trial balance for Stockton Company. Determine the owner’s equity ending balance. a. $12,150 b. $15,730 c. $6,480 d. $21,400 ANSWER: RATIONALE:

b Ending Balance of Owner's Equity = Beginning Balance of Owner's Equity + Net Income – Withdrawals = $12,940 + $3,580 – $790 = $15,730 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stockton Company LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:48 AM 92. Use the adjusted trial balance for Stockton Company. Determine the total assets. a. $8,630 b. $23,030 c. $21,930 d. $9,330 ANSWER: RATIONALE:

c Total Assets = Cash + Accounts Receivable + Prepaid Expenses + (Equipment – Accumulated Depreciation) = $6,530 + $2,100 + $700 + ($13,700 – $1,100) = $21,930 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stockton Company LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 8:50 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle 93. Use the adjusted trial balance for Stockton Company. Determine the current assets. a. $23,030 b. $9,330 c. $21,930 d. $8,630 ANSWER: RATIONALE:

b Current Assets = Cash + Accounts Receivable + Prepaid Expenses = $6,530 + $2,100 + $700 = $9,330 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stockton Company LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:13 AM 94. Use the adjusted trial balance for Stockton Company. Determine the total liabilities for the period. a. $1,900 b. $6,200 c. $4,300 d. $20,240 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Total Liabilities = Accounts Payable + Notes Payable = $1,900 + $4,300 = $6,200 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stockton Company LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:16 AM

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Chapter 4 - Completing the Accounting Cycle 95. The balance sheet should be prepared a. before the income statement and the statement of owner’s equity b. before the income statement and after the statement of owner’s equity c. after the income statement and the statement of owner’s equity d. after the income statement and before the statement of owner’s equity ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 96. The statement of owner’s equity begins with the beginning balance followed by a. adding net income less withdrawals b. adding net income plus investments c. adding investments less withdrawals d. adding investments plus net income less withdrawals ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 97. The income statement will present a. revenues less expenses (ordered largest to smallest amounts) with miscellaneous expense listed last b. revenues less expenses (ordered smallest to largest amounts) with miscellaneous expense listed last c. revenues less expenses (ordered in alphabetical order) d. revenues less expenses (order is not important) ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:19 AM 98. The classified balance sheet will show which asset subsections? a. current assets and other equity b. current assets and property, plant, and equipment c. current liabilities and short-term assets d. other revenues and property, plant and equipment ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 99. The classified balance sheet will show which liability subsections? a. current liabilities and long-term liabilities b. current liabilities and other liabilities c. other liabilities and long-term liabilities d. present liabilities and tomorrow’s liabilities ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 100. Debts listed as current liabilities are those that a. will be paid in less than one year b. are due to be paid in 5 to 10 years c. are due to be paid in more than one year d. are owed to the owner and will never be paid ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 101. On the balance sheet, owner’s equity is a. added to assets and the two are equal to liabilities b. added to liabilities and the two are equal to assets c. subtracted from liabilities and the net amount is equal to assets d. equal to the total of assets and liabilities ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:21 AM 102. Balance sheet accounts a. represent amounts accumulated during a specific period of time b. are called real accounts c. have zero balances after the closing entries have been posted d. are not affected by adjustments ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 103. Which of the following is not true about closing entries? a. There are two closing entries that update the owner’s equity account. b. After the first closing entry, the owner's capital account has been increased (decreased) by the amount of net income (or loss) for the period. c. All real accounts are closed at the end of the period. d. By closing nominal accounts at the end of the period to zero, it is possible to isolate next period’s information correctly. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:27 AM 104. After posting the first closing entry to the owner's capital account, the balance will be increased (decreased) by a. zero b. owner’s equity c. revenues for the period d. the net income (net loss) for the period ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:31 AM

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Chapter 4 - Completing the Accounting Cycle 105. What is the first account that should be listed in the post-closing trial balance? a. Net Income b. Owner, Capital c. Cash d. Fees Earned ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:33 AM 106. Which of the following account groups includes nominal accounts? a. Cash, Dividends, Wages Payable b. Prepaid Insurance, Equipment, Fees Earned c. Common Stock, Dividends, Net Income d. Rent Revenue, Fees Earned, Miscellaneous Expense ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:35 AM

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Chapter 4 - Completing the Accounting Cycle 107. There are two closing entries. The first one is to close _____; the second one is to close _____. a. revenues and expenses, the drawing account b. revenues, expenses and the drawing account c. revenues, expenses d. the drawing account, revenues ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:40 AM 108. Closing entries a. need not be journalized if adjusting entries are prepared b. need not be posted if the financial statements are prepared from the work sheet c. are not needed if adjusting entries are prepared d. must be journalized and posted ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 109. Closing entries are dated in the journal as of a. the date they are actually journalized, although they are generally prepared after the end of the accounting period b. the last day of the accounting period, although they are actually journalized after the end of the accounting period c. the first day of the accounting period, although they are actually journalized well after the beginning of the accounting period d. the first day of the subsequent accounting period ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 110. Which of the accounts below would be closed by posting a debit to the account? a. Unearned Revenue b. Fees Earned c. Josh Morton, Drawing d. Miscellaneous Expense ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 111. Which of the following accounts should be closed to the capital account at the end of the year? a. Service Revenue b. Equipment c. Prepaid Insurance d. Unearned Rent ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:42 AM 112. Which of the following accounts will not be closed to the capital account at the end of the year? a. Utilities Expense b. Fees Earned c. Prepaid Insurance d. Insurance Expense ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:47 AM

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Chapter 4 - Completing the Accounting Cycle 113. Which of the following accounts will be debited in the closing entry at the end of the year? a. Rent Expense b. Fees Earned c. Unearned Fees d. Depreciation Expense ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:49 AM 114. The entry to close the appropriate insurance account at the end of the accounting period is a. debit Owner’s Capital; credit Prepaid Insurance b. debit Prepaid Insurance; credit Owner’s Capital c. debit Insurance Expense; credit Owner’s Capital d. debit Owner’s Capital; credit Insurance Expense ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 9:51 AM

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Chapter 4 - Completing the Accounting Cycle 115. Which of the following accounts ordinarily appears in the post-closing trial balance? a. Fees Earned b. Supplies Expense c. Zane White, Drawing d. Unearned Rent ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 116. The post-closing trial balance differs from the adjusted trial balance in that it does not a. take into account closing entries b. take into account adjusting entries c. include balance sheet accounts d. include income statement accounts ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 117. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet: Accumulated Depreciation Fees Earned Depreciation Expense Insurance Expense Prepaid Insurance Supplies Supplies Expense

$ 3,200 17,400 1,300 400 4,800 900 3,800

Net income for the period is a. $5,500 b. $11,900 c. $17,400 d. $8,700 ANSWER: RATIONALE:

b Net Income = Fees Earned – (Depreciation Expense + Insurance Expense + Supplies Expense) = $17,400 – ($1,300 + $400 + $3,800) = $11,900 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 118. A summary of selected ledger accounts appears below for Alberto’s Plumbing Services for the current calendar year-end.

12/31

6/30 11/30

Alberto, Capital 8,500 1/1 12/31 Alberto, Drawing 3,500 12/31 5,000

6,500 15,000

8,500

Net income for the period is a. $13,000 b. $33,500 c. $15,000 d. $18,500 ANSWER: RATIONALE:

c There are two entries on December 31 to the owner’s capital account. One is a debit and the other is a credit. The debit represents the closing of drawing: therefore, the credit must be for net income. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 10:27 AM

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Chapter 4 - Completing the Accounting Cycle 119. Diane's Designs purchased a one-year liability insurance policy on March 1 of a year for $8,400 and recorded it as a prepaid expense. Which of the following amounts would be recorded as insurance expense during the adjusting process at the end of Diane’s first month of operations on March 31? a. $8,400 b. $840 c. $700 d. $7,700 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Insurance Expense for One Month = $8,400/12 = $700 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 120. The journal entry to close Fees Earned, $750, and Rent Revenue, $175, during the year-end closing process would be a. Dec. 31 Fees Earned 750 Rent Revenue 175 Owner’s Capital 925 b. Dec. 31 Owner’s Capital 925 Fees Earned 750 Rent Revenue 175 c. Dec. 31 Revenues 925 Owner’s Capital 925 d. Dec. 31 Owner’s Capital 925 Revenues 925 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 10:34 AM 121. Evan Roberts owns a business, Shores Sports, that rents canoes and kayaks. Below is the adjusted trial balance at December 31.

Account Debit No. Balances

Credit Balances

Cash

1,500

Accounts Receivable

2,000

Interest Receivable

100

Prepaid Insurance

1,600

Notes Receivable (long-term)

2,800

Equipment

15,000

Accumulated Depreciation

3,000

Accounts Payable

2,400

Accrued Expenses Payable

3,920

Income Taxes Payable

2,700

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Chapter 4 - Completing the Accounting Cycle Unearned Rent Fees

500

Evan Roberts, Capital

7,700

Evan Roberts, Drawing

Rent Fees Earned

37,000

Furniture Rental Revenue

1,200

Interest Revenue

100

Wages Expense

19,000

Depreciation Expense

1,800

Utilities Expense

320

Insurance Expense

700

Maintenance Expense

9,000

Income Tax Expense

2,700

2,000

58,520

The entry required to close the revenue and expense accounts at the end of the period includes a a. debit for $37,000 b. credit for $38,300 c. debit for $38,200 d. credit for $37,000 ANSWER: RATIONALE:

b Total Revenue = Rent Fees Earned + Furniture Rental Revenue + Interest Revenue = $37,000 + $1,200 + $100 = $38,300

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 10:49 AM 122. Evan Roberts owns a business, Shore Sports, that rents canoes and kayaks. Below is the adjusted trial balance at December 31. Account Debit Credit No. Balances Balances Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle Cash

1,500

Accounts Receivable

2,000

Interest Receivable

100

Prepaid Insurance

1,600

Notes Receivable (long-term)

2,800

Equipment

15,000

Accumulated Depreciation

3,000

Accounts Payable

2,400

Accrued Expenses Payable

3,920

Income Taxes Payable

2,700

Unearned Rent Fees

500

Evan Roberts, Capital

7,700

Evan Roberts, Drawing

Rent Fees Earned

37,000

Furniture Rental Revenue

1,200

Interest Revenue

100

Wages Expense

19,000

Depreciation Expense

1,800

Utilities Expense

320

Insurance Expense

700

Maintenance Expense

9,000

Income Tax Expense

2,700

2,000

58,520

Totals

58,520

The entry required to close the expense accounts at the end of the period will a. increase Owner’s Capital by $35,520 b. decrease Owner’s Capital by $35,520 c. increase Owner’s Capital by $33,520 d. decrease Owner’s Capital by $33,520 ANSWER: RATIONALE:

c Total Expenses = Wages Expense + Depreciation Expense + Utilities Expense + Insurance Expense + Maintenance Expense + Income Tax Expense = $19,000 + $1,800 + $320 + $700 + $9,000 + $2,700 = $33,520

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying Multiple Choice False

QUESTION TYPE: HAS VARIABLES:

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Chapter 4 - Completing the Accounting Cycle LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 10:57 AM Use the following end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable C. Finley, Capital C. Finley, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense

Adjusted Trial Balance

Income Statement

Balance Sheet

Dr.

Cr.

48,000

18,000 6,000 57,000

Cr.

18,000

25,000

6,000

33,000

3,000

3,000 155,000

155,000

63,000 27,000

15,000 237,000

15,000 105,000 50,000 155,000

237,000

Net income

155,000

132,000

155,000

132,000

82,000 50,000 132,000

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Chapter 4 - Completing the Accounting Cycle 123. Use the end-of-period spreadsheet for Finley Company. The first closing entry would include a a. debit to C. Finley, Capital for $155,000 b. debit to C. Finley, Capital for $50,000 c. credit to C. Finley, Capital for $50,000 d. credit to C. Finley, Capital for $155,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finley Company LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:05 PM 124. Use the end-of-period spreadsheet for Finley Company. The expenses would be closed by a. debiting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 b. debiting Expenses for $105,000 c. crediting Expenses for $105,000 d. crediting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finley Company LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:05 PM

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Chapter 4 - Completing the Accounting Cycle 125. Use the end-of-period spreadsheet for Finley Company. The entry to close C. Finley, Drawing would be a. debit C. Finley, Capital, $3,000; credit C. Finley, Drawing, $3,000 b. debit C. Finley, Capital, $12,000; credit C. Finley, Drawing, $12,000 c. debit C. Finley, Drawing, $3,000; credit C. Finley, Capital, $3,000 d. debit C. Finley, Drawing, $12,000; credit C. Finley, Capital, $12,000 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finley Company LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:06 PM

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Chapter 4 - Completing the Accounting Cycle 126. Use the end-of-period spreadsheet for Finley Company. The first closing entry would be a. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 260,000 b. Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 Fees Earned 155,000 c. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 d. C. Finley, Capital 260,000 Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 127. Use the end-of-period spreadsheet for Finley Company. The ending balance in C. Finley, Capital is a. $33,000 b. $80,000 c. $30,000 d. $83,000 ANSWER: RATIONALE:

b Ending Balance of C. Finley, Capital = Beginning Balance of C. Finley, Capital + Net Income – C. Finley, Drawing = $33,000 + ($155000 – $105,000) – $3,000 = $33,000 + $50,000 – $3,000 = $80,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finley Company LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:07 PM

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Chapter 4 - Completing the Accounting Cycle 128. Which of the following has steps of the accounting cycle in proper sequence (some steps may be missing)? a. analyze and record transactions, post transaction to the ledger, prepare a trial balance, prepare financial statements, journalize closing entries, analyze adjustment data and prepare adjusting entries b. prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger c. analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, and prepare a post-closing trial balance d. prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 129. In the accounting cycle, the last step is a. preparing the financial statements b. journalizing and posting the adjusting entries c. preparing a post-closing trial balance d. journalizing and posting the closing entries ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 130. Of the following steps of the accounting cycle, which step should be completed first? a. Closing entries are journalized and posted to the ledger. b. Transactions are posted to the ledger. c. Adjusting entries are journalized and posted to the ledger. d. Financial statements are prepared. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 131. Of the following steps of the accounting cycle, which step should be completed last? a. An adjusted trial balance is prepared. b. Transactions are posted to the ledger. c. An unadjusted trial balance is prepared. d. Adjusting entries are journalized and posted to the ledger. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 132. The accounting cycle requires three trial balances be done. In what order should they be prepared? a. post-closing, unadjusted, adjusted b. unadjusted, post-closing, adjusted c. unadjusted, adjusted, post-closing d. post-closing, adjusted, unadjusted ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 133. During the end-of-period processing, which of the following best describes the logical order of steps? a. p reparation of adjustments, adjusted trial balance, financial statements b. p reparation of income statement, adjusted trial balance, balance sheet c. p reparation of adjusted trial balance, cross-referencing, journalizing d. p reparation of adjustments, adjusted trial balance, posting ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Remembering Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 134. Once the adjusting entries are posted, the adjusted trial balance is prepared to a. verify that the debits and credits are in balance b. verify that the net income correctly flows into the statement of owner’s equity from the income statement c. verify that the net income (loss) is correct for the period d. verify the correct flow of accounts into the financial statements ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 12:23 PM DATE MODIFIED: 2/21/2017 12:08 PM 135. A fiscal year for a business a. ordinarily begins on the first day of a month and ends on the last day of the following twelfth month b. is determined by the federal government c. always begins on January 1 and ends on December 31 of the same year d. should end at the height of the business's annual operating cycle ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 136. The natural business year is a a. fiscal year that ends when business activities are at their lowest point b. calendar year that ends when business activities are at their lowest point c. fiscal year that ends when business activities are at their highest point d. calendar year that ends when business activities are at their highest point ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 137. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What is the current ratio for 20Y9 and 20Y8? a. 0.94 and 0.89 b. 1.07 and 1.12 c. 0.54 and 0.57 d. 1.85 and 1.77 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 12:30 PM DATE MODIFIED: 2/21/2017 12:08 PM

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Chapter 4 - Completing the Accounting Cycle 138. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What is the working capital for 20Y9 and 20Y8? a. $498,600 and $532,400 b. $229,300 and $230,900 c. $269,300 and $301,500 d. $(230,900) and $(229,300) ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 12:36 PM DATE MODIFIED: 2/21/2017 12:09 PM

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Chapter 4 - Completing the Accounting Cycle 139. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What conclusions can be drawn regarding Brayden’s ability to meet its financial obligations? a. The current ratio has worsened, and the working capital has decreased. b. The current ratio has improved, and the working capital has increased. c. The current ratio has improved, while the working capital has decreased. d. The current ratio has worsened, but the working capital has increased. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 12:38 PM DATE MODIFIED: 2/21/2017 12:09 PM

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Chapter 4 - Completing the Accounting Cycle 140. The income statement is prepared from a. the adjusted trial balance b. the Income Statement columns of the end-of-period spreadsheet c. either the Adjusted Trial Balance or the Income Statement columns of the end-of-period spreadsheet d. both the Adjusted Trial Balance and the Income Statement columns of the end-of-period spreadsheet ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 12:41 PM DATE MODIFIED: 1/24/2017 12:42 PM 141. The end-of-period spreadsheet a. is an integral part of the accounting cycle b. eliminates the need to rewrite the financial statements c. is a working paper that is required d. is used to summarize account balances and adjustments for the financial statements ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 142. Which one of the steps below is not aided by the preparation of the end-of-period spreadsheet? a. preparing the adjusted trial balance b. posting to the general ledger c. preparing the financial statements d. preparing the closing entries ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 143. An end-of-period spreadsheet includes columns for a. adjusting entries b. closing entries c. reversing entries d. adjusting and closing entries ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 144. When the end-of-period spreadsheet is complete, the Adjustments columns should have a. total credits greater than total debits if a net income was earned b. total debits greater than total credits if a net loss was incurred c. total debits greater than total credits if a net income was earned d. total debits equal to total credits ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 12:49 PM 145. The difference between the totals of the Debit and Credit columns of the Adjusted Trial Balance columns on the end-of-period spreadsheet a. is the amount of net income or loss b. indicates there is an error on the work sheet c. is the amount of owner's equity d. is the difference between revenue and expenses ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 12:51 PM

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Chapter 4 - Completing the Accounting Cycle 146. Net income appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Debit column of the Adjustments columns c. Debit column of the Income Statement columns d. Credit column of the Income Statement columns ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 12:52 PM 147. A net loss appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Credit column of the Balance Sheet columns c. Debit column of the Income Statement columns d. Credit column of the Adjustments columns ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 12:53 PM

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Chapter 4 - Completing the Accounting Cycle 148. After net income is entered on the end-of-period spreadsheet, the Balance Sheet Debit and Credit columns must a. be the same amount as the total amount of the Income Statement Debit and Credit columns b. equal each other c. be the same amount as the total amount in the Adjusted Trial Balance Debit and Credit columns d. not be equal to each other and need not be the same total amounts as any other pair of columns on the work sheet ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 149. Which of the following statements indicates that a company earned a net income for the period? a. The sum of the credits exceeds the sum of the debits in the Balance Sheet columns on the end-of-period spreadsheet. b. The sum of the credits exceeds the sum of the debits in the Income Statement columns on the end-of-period spreadsheet. c. The sum of the debits exceeds the sum of the credits in the Income Statement columns on the end-of-period spreadsheet. d. Cash inflows exceed cash outflows. ANSWER: POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 150. Which of the following accounts would appear in the Income Statement columns of the end-of-period spreadsheet? a. Cash b. Prepaid Insurance c. Unearned Revenue d. Net Loss ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 12:56 PM 151. Which of the following accounts would not appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Terry James, Drawing b. Service Revenue c. Unearned Revenue d. Terry James, Drawing and Unearned Revenue ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:00 PM

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Chapter 4 - Completing the Accounting Cycle 152. Which of the following accounts would appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Consulting Revenue b. Prepaid Insurance c. Rent Expense d. Fees Earned ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:01 PM

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Chapter 4 - Completing the Accounting Cycle 153. Daniel's end-of-period spreadsheet at the end of July has $4,950 in the Balance Sheet Credit column for Accumulated Depreciation. The end-of-period spreadsheet at the end of August has $7,600 in the Balance Sheet Credit column for Accumulated Depreciation. What is the amount of the depreciation expense adjustment for the month of August? a. $12,550 b. $7,600 c. $4,950 d. $2,650 ANSWER: RATIONALE:

d Amount of Depreciation Expense Adjustment for August = Accumulated Depreciation (at end of August) – Accumulated Depreciation (at end of July) = $7,600 – $4,950 = $2,650 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 154. Which of the following does not appear on the end-of-period spreadsheet? a. adjusting entries b. the unadjusted trial balance c. closing entries d. the drawing account ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:05 PM 155. An indication that the end-of-period spreadsheet columns are in balance and the spreadsheet is complete is a. the word "Total" written at the bottom of each pair of columns b. the double rule under each pair of columns c. the circles around each total d. the final figures written in ink ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 156. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns are $36,755 and $32,735, respectively. What is the amount of net income or net loss for the period? a. $4,020 of net income b. $36,755 of net loss c. $4,020 of net loss d. $32,735 of net income ANSWER: RATIONALE:

a Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $36,755 – $32,735 = $4020 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 157. After all of the account balances have been extended to the Income Statement columns of the work sheet, the totals of the Debit and Credit columns are $77,500 and $83,900, respectively. What is the amount of the net income or net loss for the period? a. $6,400 of net income b. $6,400 of net loss c. $83,900 of net income d. $77,500 of net loss ANSWER: RATIONALE:

a Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $83,900 – $77,500 = $6,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 158. On September 1, the company pays rent for 12 months in advance and debits an asset account. At year-end, the adjusting entry on the work sheet would a. increase an expense account b. decrease a liability account c. increase an asset account d. decrease an expense account ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:09 PM 159. On March 1, a company collects revenue in advance for the next 12 months and credits a liability account. The adjusting entry at year-end on the work sheet would a. increase a liability account b. decrease an asset account c. decrease a revenue account d. decrease a liability account ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:11 PM

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Chapter 4 - Completing the Accounting Cycle 160. Which of the following is not an essential part of the accounting records? a. journal b. ledger c. chart of accounts d. end-of-period spreadsheet ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:12 PM 161. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns show debits of $37,686 and credits of $41,101. This indicates that a. neither net income nor loss can be calculated because it is found on the income statement b. the company has a net loss of $3,415 for the period c. the company has a net income of $3,415 for the period d. the amounts are out of balance and need to be corrected ANSWER: RATIONALE:

b Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $37,686 – $41,101 = $(3,415) Net Loss = $3,415 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

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Chapter 4 - Completing the Accounting Cycle 162. The Income Statement columns in the end-of-period spreadsheet show that debits are equal to $55,800 and credits are $77,520. What does this information mean to the accountant? a. There is a net income of $21,720. b. There is a net loss of $21,720. c. The accounts are out of balance, indicating that an error has been made. d. The accounts have not been updated. ANSWER: RATIONALE:

a Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $77,520 – $55,800 = $21,720 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/24/2017 1:15 PM 163. Accrued fees earned but not recorded at August 31 are $25,750. Which of the following is correct for the reversing entry on September 1? a. credit Unearned Fees for $25,750 b. debit Accounts Receivable for $25,750 c. debit Fees Earned for $25,750 d. credit Fees Earned for $25,750 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 1:15 PM DATE MODIFIED: 1/24/2017 1:18 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle 164. Wages are $37,500 per week for a five-day workweek, ending on Friday. The last payday of the year was Friday, June 26. Which of the following is correct for the reversing entry on July 1? a. credit Salaries Payable for $15,000 b. debit Salaries Payable for $37,500 c. debit Salaries Expense for $15,000 d. credit Salaries Expense for $15,000 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 1:19 PM DATE MODIFIED: 1/24/2017 1:20 PM

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Chapter 4 - Completing the Accounting Cycle 165. Wages are $37,500 per week for a five-day workweek, ending on Friday. The last payday of the year was Friday, June 26. Determine the balance in Salaries Expense on July 1 after reversing entries have been journalized and posted to the ledger. a. credit balance of $15,000 b. debit balance of $37,500 c. debit balance of $15,000 d. credit balance of $7,500 ANSWER: RATIONALE:

a There are two days remaining in June for which salaries expense will be accrued on June 30 during the adjusting process. ($37,500/5 days) × 2 days = $15,000. Salaries Expense is closed (to a $0 balance) at the end of the period. The reversing entry is a debit to Salaries Payable and a credit to Salaries Expense for $15,000, leaving a credit balance in Salaries Expense on July 1. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/24/2017 1:21 PM DATE MODIFIED: 2/21/2017 12:12 PM Matching Match each journal entry that follows as one of the types of journal entries (a–c) below. a. Journal entries b. Adjusting journal entries c. Closing journal entries DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 12:15 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle 166. Cash

450 Fees Earned

450

ANSWER: a POINTS: 1 167. Fees Earned ABC, Capital

650 650

ANSWER: c POINTS: 1 168. Utilities Expense Cash

430 430

ANSWER: a POINTS: 1 169. Wages Expense 870 Wages Payable 870 ANSWER: b POINTS: 1 170. Unearned Revenue 985 Fees Earned 985 ANSWER: b POINTS: 1 171. Owner's Capital 597 Rent Expense 200 Supplies Expense 180 Utilities Expense 110 Miscellaneous Exp. 107 ANSWER: c POINTS: 1 172. RS, Drawing Cash

215 215

ANSWER: a POINTS: 1 173. Accounts Receivable 325 Fees Earned 325 Customer billed for services performed. ANSWER: a POINTS: 1

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Chapter 4 - Completing the Accounting Cycle Subjective Short Answer 174. You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31. Required While you are willing to work with Richard, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request? ANSWER:

A set of financial statements provides useful information concerning the economic condition of a company. For example, the balance sheet describes the financial condition of the company as of a given date and is useful in assessing the company’s financial soundness and liquidity. The income statement describes the results of operations for a period and indicates the profitability of the company. The statement of owner’s equity describes the changes in the owner’s interest in the company for a period. Each of these statements is useful in evaluating whether to extend credit to the company. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 7:39 AM

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Chapter 4 - Completing the Accounting Cycle 175. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. What three accounts do you think should be relabeled for greater clarity?

Cash Billings Due from Others Office Supplies Trucks Equipment Amounts Owed to Others Investment in Business Service Revenue Wages Expense Rent Expense Insurance Expense Utilities Expense Miscellaneous Expense

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

ANSWER:

The following items should be relabeled for greater clarity: Billings Due from Others—Accounts Receivable Amounts Owed to Others—Accounts Payable Investment in Business—Richard Tracy, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 7:40 AM 176. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle Which of the following accounts do you think might need to be adjusted before an accurate set of financial statements could be prepared?

ANSWER:

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

The following adjustments might be necessary before an accurate set of financial statements can be prepared: ∙ No office supplies expense is shown. The office supplies account should be adjusted for the supplies used during the year. ∙ No depreciation expense is shown for the trucks or equipment. An adjusting entry should be prepared for depreciation expense on each of these assets. ∙ An inquiry should be made as to whether any accrued expenses, such as wages or utilities, exist at the end of the year. ∙ An inquiry should be made as to whether any prepaid expenses, such as rent or insurance, exist at the end of the year. ∙ An inquiry should be made as to whether any unearned revenue exists at the end of the year. ∙ An inquiry should be made as to whether the owner withdrew any funds from the company during the year. No drawing account is shown in the “statement of accounts.”

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:51 PM 1/25/2017 7:43 AM

177. The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance would flow to (a) the income statement, (b) the statement of owner’s equity, or (c) the balance sheet. 1. Accounts Payable 2. Dobson, Drawing 3. Depreciation Expense 4. Accumulated Depreciation 5. Fees Earned 6. Unearned Fees 7. Supplies 8. Supplies Expense ANSWER:

1. Balance sheet 2. Statement of owner's equity 3. Income statement 4. Balance sheet 5. Income statement 6. Balance sheet 7. Balance sheet 8. Income statement POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 7:46 AM

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Chapter 4 - Completing the Accounting Cycle 178. Hannah Roberts owns and operates Hannah's Pool Service Company. On January 1, Hannah Roberts, Capital had a balance of $252,000. During the year, Hannah invested an additional $32,000 and withdrew $52,400. For the year ended December 31, Hannah's Pool Service Company reported a net income of $73,200. Prepare a statement of owner’s equity for the year ended December 31. ANSWER: Hannah's Pool Service Company Statement of Owner’s Equity For the Year Ended December 31 Hannah Roberts, capital, January 1 Investment during year Net income Withdrawals during year Increase in owner’s equity Hannah Roberts, capital, December 31

$252,000 $32,000 73,200 (52,400) 52,800 $304,800

POINTS: DIFFICULTY:

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Chapter 4 - Completing the Accounting Cycle 179. The following accounts appear in an adjusted trial balance of Blaine Auto Service Company. Indicate whether each account would be reported in the (a) current assets, (b) property, plant, and equipment, (c) current liabilities, (d) longterm liabilities, or (e) owner’s equity section of the December 31 balance sheet of Blaine Auto Service Company. 1. 2. 3. 4. 5. 6. 7. 8.

Blaine Brock, Capital Accumulated Depreciation Unearned Revenues Mortgage Payable Equipment Notes Payable (due in two years) Cash Accounts Receivable

1. (e) Owner’s equity 2. (b) Property, plant, and equipment 3. (c) Current liabilities 4. (d) Long-term liabilities 5. (b) Property, plant, and equipment 6. (d) Long-term liabilities 7. (a) Current assets 8. (a) Current assets POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM ANSWER:

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Chapter 4 - Completing the Accounting Cycle 180. Describe a classified balance sheet. ANSWER:

A classified balance sheet subsections assets as current assets and property, plant, and equipment. It also subsections liabilities as current liabilities and long-term liabilities. It also includes the owner's equity section. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM 181. The balances for the accounts listed below appeared in the Adjusted Trial Balance columns of the work sheet. Indicate whether each balance should flow to (a) the income statement, (b) the statement of owner’s equity, or (c) the balance sheet. (1) (2) (3) (4) (5) (6)

Salaries Payable Fees Earned Accounts Payable Supplies Supplies Expense Unearned Rent

ANSWER:

(7) (8) (9) (10) (11) (12) (a) (b) (c)

Felipe Ramos, Drawing Equipment Accounts Receivable Accumulated Depreciation Salary Expense Depreciation Expense

Income statement: 2, 5, 11, 12 Statement of owner's equity: 7 Balance sheet: 1, 3, 4, 6, 8, 9, 10

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 7:52 AM 182. The following balance sheet contains errors. Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle

Mark Brock Services Co. Balance Sheet For the Year Ended December 31 Assets Current assets: Cash

Liabilities Current liabilities: Accounts receivable Accum. depr.— building Accum. depr.— equipment Net income

$ 7,170

Accounts payable

7,500

Supplies Prepaid insurance Land Total current assets

2,590 800 24,000

$ 42,060 Total liabilities

$ 10,000 12,525 7,340 11,500 $ 41,365

Owner’s Equity Property, plant, and equipment: Building Equipment Total property, plant, and equipment

Wages payable Mark Brock, capital Total owner’s equity

$ 1,500 88,645 $ 90,145

Total liabilities and $131,510 owner’s equity

$131,510

$43,700 29,250

72,950

Total assets

(a) List the errors in the balance sheet above and (b) prepare a corrected balance sheet.

ANSWER:

(a) (1) (2) (3) (4)

(5) (6) (7) (8)

Date of statement should be "December 31" not "For the Year Ended December 31." Accounts payable should be a current liability. Land is a fixed asset and should be listed as property, plant, and equipment. Accumulated depreciation should be deducted from the related fixed asset in the property, plant, and equipment section. An adding error was made in determining the amount of total assets. Accounts receivable should be a current asset. Net income would be reported on the income statement. Wages payable should be a current liability.

A corrected balance sheet would be as follows: Mark Brock Services Co. Copyright Cengage Learning. Powered by Cognero.

Page 103

Chapter 4 - Completing the Accounting Cycle Balance Sheet December 31 Assets Current assets: $ 7,170

Cash Accounts receivable

10,000

Supplies

2,590

Prepaid insurance

800

Total current assets

$ 20,560

Property, plant, and equipment: $24,000

Land Building

$43,700

Less accum. depr.

12,525 $29,250

31,175

7,340

21,910

Equipment Less accum. depr. Total property, plant, and equipment

77,085 $97,645

Total assets Liabilities Current liabilities: Accounts payable

$7,500

Wages payable

1,500 $ 9,000

Total liabilities Owner's Equity Mark Brock, capital

88,645

Total liabilities and owner's equity

$97,645

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:51 PM 2/21/2017 4:37 PM

183. Indicate whether each of the following would be reported in the financial statements as a(n) (a) current asset, (b) current liability, (c) revenue, or (d) expense: (1) (2) (3) (4)

Supplies Unearned Fees Prepaid Advertising Advertising Expense

(5) (6) (7) (8)

Supplies Expense Prepaid Insurance Accounts Payable Fees Earned

(1) current asset (2) current liability (3) current asset (4) expense (5) expense (6) current asset (7) current liability (8) revenue POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM ANSWER:

Page 105

Chapter 4 - Completing the Accounting Cycle 184. The following accounts were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Finnegan Co.: Accumulated Depreciation Fees Earned Depreciation Expense Rent Expense Prepaid Insurance Supplies Supplies Expense

$32,000 78,000 7,250 34,000 6,000 400 1,800

Prepare an income statement. ANSWER: Finnegan Co. Income Statement For the Period Ended April 30 Fees earned Expenses: Rent expense $34,000 Depreciation expense 7,250 Supplies expense 1,800 Total expenses Net income POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM

$78,000

43,050 $34,950

Page 106

Chapter 4 - Completing the Accounting Cycle 185. The following revenue and expense account balances were taken from the Income Statement columns of the work sheet for Fraser Services Co. for December 31: Depreciation Expense Insurance Expense Miscellaneous Expense Rent Expense Service Revenue Supplies Expense Utilities Expense Wages Expense

$ 4,950 2,900 1,200 24,000 92,500 3,150 5,000 63,750

Prepare an income statement. ANSWER: Fraser Services Co. Income Statement For the Year Ended December 31 Service revenue Expenses: Wages expense $63,750 Rent expense 24,000 Utilities expense 5,000 Depreciation expense 4,950 Supplies expense 3,150 Insurance expense 2,900 Miscellaneous expense 1,200 Total expenses Net loss

$ 92,500

104,950 $(12,450)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 8:08 AM 186. The following data were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Abigail Company: Accumulated Depreciation Prepaid Rent Supplies Copyright Cengage Learning. Powered by Cognero.

$42,400 6,800 850 Page 107

Chapter 4 - Completing the Accounting Cycle Unearned Fees Trucks Cash Abigail, Capital

7,310 49,300 3,400 ?

Prepare a classified balance sheet. ANSWER: Abigail Company Balance Sheet April 30 Assets

Liabilities

Current assets: Cash Supplies Prepaid rent

$ 3,400

Current liabilities:

850

Unearned fees

6,800

Total current assets

$11,050

Property, plant, and equipment:

Trucks Less accum. depr. Total property, plant, and equipment Total assets

$ 7,310

$49,300

Owner's Equity Abigail, capital

10,640

Total liabilities and owner's equity

$17,950

42,400

6,900 $17,950

POINTS: DIFFICULTY:

Page 108

Chapter 4 - Completing the Accounting Cycle 187. Indicate whether each of the following would be reported in the section of financial statements identified as (a) current asset, (b) property, plant, and equipment, (c) current liability, (d) revenue, or (e) expense: (1) (2) (3) (4) (5) (6) (7) (8) (9)

Truck Accumulated Depreciation Telephone Expense Fees Earned Wages Payable Prepaid Insurance Office Supplies Dining Expense Unearned Rent

ANSWER:

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Property, plant, and equipment Property, plant, and equipment Expense Revenue Current liability Current asset Current asset Expense Current liability

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 8:13 AM 188. The following is the adjusted trial balance for Nadia Company.

Cash Accounts Receivable Prepaid Expenses Equipment

Nadia Company Adjusted Trial Balance December 31 Account Debit Credit No. Balances Balances 11 5,130 12 3,300 13 420 18 12,400

Page 109

Chapter 4 - Completing the Accounting Cycle Accumulated Depreciation Accounts Payable Notes Payable (due on June 30) Nadia Porter, Capital Nadia Porter, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Totals

19 21 22 31 32 41 51 52 53 54 59

2,200 700 3,070 13,000 700 10,930 2,450 1,900 1,475 1,150 975 29,900

29,900

Prepare an income statement, statement of owner’s equity, and balance sheet. Assume that the capital account started with a beginning balance of $10,000 and that the owner made an additional investment of $3,000 during the period. ANSWER: Nadia Company Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Rent expense Utilities expense Depreciation expense Miscellaneous expense Total expenses

$10,930 $2,450 1,900 1,475 1,150 975 7,950 $ 2,980

Net income Nadia Company Statement of Owner’s Equity For the Year Ended December 31

$10,000

Nadia Porter, capital, January 1 Investments during the year

$3,000

Net income for the year

2,980

Withdrawals during the year

(700)

Increase in owner's equity Nadia Porter, capital, December 31

5,280 $15,280

Page 110

Chapter 4 - Completing the Accounting Cycle Nadia Company Balance Sheet December 31 Assets

Liabilities

Current assets:

Current liabilities:

Cash

$ 5,130

Accounts payable

$ 700

Accounts receivable

3,300

Notes payable

3,070

Prepaid expenses

420

Total liabilities

$3,770

Total current assets

$ 8,850

Property, plant, and equipment: Equipment

$12,400

Owner’s Equity

Less accum. depr.

2,200

Nadia Porter, capital

Total property, plant, and equipment

10,200

Total assets

$19,050

15,280

Total liabilities and owner’s equity

$19,050

POINTS: DIFFICULTY:

Page 111

Chapter 4 - Completing the Accounting Cycle 189. Selected T accounts appear below for the current year for Linda's Surveying Services.

12/31

Linda Winter, Capital 25,000 1/1 12/31

20,000 48,000

3/31 12/22

Linda Winter, Drawing 12,00012/31 25,000 13,000

Prepare a statement of owner's equity. ANSWER: Linda's Surveying Services Statement of Owner's Equity For the Year Ended December 31 Linda Winter, capital, January 1 Net income for the year $ 48,000 Withdrawals for the year (25,000) Increase in owner’s equity Linda Winter, capital, December 31

$20,000

23,000 $43,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 8:50 AM

Page 112

Chapter 4 - Completing the Accounting Cycle 190. List and describe the purpose of the four closing entries. ANSWER:

1. Close revenues and expenses to capital account. 2. Close drawing account to capital account.

At the beginning of the next period, temporary accounts should have zero balances. To achieve a zero balance, temporary account balances are transferred to permanent accounts at the end of the accounting period. The entries that transfer these balances are called closing entries and the transfer process is called the closing process. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 8:51 AM 191. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31.

Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Copyright Cengage Learning. Powered by Cognero.

Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

Credit Balances

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 Page 113

Chapter 4 - Completing the Accounting Cycle Maintenance Expense Income Tax Expense

55 56

9,000 2,700 58,520

58,520

Prepare the entry required to close the revenue and expense accounts at the end of the period. ANSWER:

Dec. 31

Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Robert Evans, Capital

37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 4,780

POINTS: DIFFICULTY:

Page 114

Chapter 4 - Completing the Accounting Cycle 192. Prior to adjustment at August 31, Salary Expense has a debit balance of $298,500. Salaries owed but not paid as of the same date total $4,200. Present the entries to record the following: (1) Accrued salaries as of August 31. (2) Closing of Salary Expense as of August 31.

ANSWER:

(1) Salary Expense Salaries Payable

4,200

(2) Owner's Capital Salary Expense

302,700

4,200

302,700

POINTS: DIFFICULTY:

Page 115

Chapter 4 - Completing the Accounting Cycle 193. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31. Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

Credit Balances

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Prepare the entry required to close the drawing account at the end of the period. ANSWER:

Dec. 31

Robert Evans, Capital Robert Evans, Drawing

2,000 2,000

POINTS: DIFFICULTY:

Page 116

Chapter 4 - Completing the Accounting Cycle 194. Identify which of the following accounts should be closed with a debit or a credit at the end of the fiscal year. If it is not closed, mark as n/a. 1. Utilities Payable 2. Utilities Expense 3. Supplies 4. Supplies Expense 5. Fees Earned 6. Unearned Fees 7. Accounts Receivable 8. Jason Hill, Drawing 9. Jason Hill, Capital 10. Accumulated Depreciation—Equipment 11. Depreciation Expense—Equipment 12. Equipment 13. Prepaid Insurance 14. Insurance Expense ANSWER:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Utilities Payable Utilities Expense Supplies Supplies Expense Fees Earned Unearned Fees Accounts Receivable Jason Hill, Drawing Jason Hill, Capital Accumulated Depreciation—Equipment Depreciation Expense—Equipment Equipment Prepaid Insurance Insurance Expense

n/a credit n/a credit debit n/a n/a n/a n/a n/a credit n/a n/a credit

POINTS: DIFFICULTY:

1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 3:54 PM

Page 117

Chapter 4 - Completing the Accounting Cycle 195. After the accounts have been adjusted at January 31, the end of the year, the following balances are taken from the ledger of Harrison's Dog Walking Service Company: Harrison Taylor, Capital Harrison Taylor, Drawing Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense

$349,000 6,000 124,600 29,000 43,000 7,300 5,700

Journalize the four entries required to close the accounts ANSWER: Jan. 31 Fees Earned

124,600

Wages Expense

29,000

Rent Expense

43,000

Supplies Expense

7,300

Miscellaneous Expense

5,700

Harrison Taylor, Capital

39,600

31Harrison Taylor, Capital

6,000 6,000

Harrison Taylor, Drawing POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 10:59 AM 196. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31.

Cash Copyright Cengage Learning. Powered by Cognero.

Account No. 11

Debit Balances 1,500

Credit Balances Page 118

Chapter 4 - Completing the Accounting Cycle Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56

2,000 100 1,600 2,800 15,000 3,000 2,400 3,920 2,700 500 13,700 2,000 31,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Prepare the closing entry required to transfer the income or loss at the end of the period. ANSWER: Dec. 31 Rent Rees Earned Furniture Rental Revenue Interest Revenue Robert Evans, Capital Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

31,000 1,200 100 1,220 19,000 1,800 320 700 9,000 2,700

POINTS: DIFFICULTY:

Page 119

Chapter 4 - Completing the Accounting Cycle DATE CREATED: DATE MODIFIED:

1/16/2017 3:51 PM 2/21/2017 3:55 PM

197. On the basis of the following data taken from the Adjusted Trial Balance columns of the work sheet for the year ended March 31 for Banes Domino's Company, journalize the closing entries. Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Jack Banes, Capital Jack Banes, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense

30,000 45,200 5,000 169,900 32,000 12,500 71,600 47,000 510,000 244,500 48,000 25,000 9,500 2,000 626,100

626,100

ANSWER: Mar. 31 Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense Jack Banes, Capital

510,000

31 Jack Banes, Capital Jack Banes, Drawing

47,000

244,500 48,000 25,000 9,500 2,000 181,000

47,000

POINTS: DIFFICULTY:

Page 120

Chapter 4 - Completing the Accounting Cycle 198. After all adjustments have been made, but before the accounts have been closed, the following balances were taken from the ledger of Ramona’s Designs: Accounts Payable Accounts Receivable Accumulated Depreciation Cash Depreciation Expense Equipment Insurance Expense Prepaid Insurance

$ 27,600 64,500 73,325 17,150 13,500 165,000 2,510 6,275

Rent Expense Salary Expense Salaries Payable Service Revenue Supplies Supplies Expense Ramona Cross, Capital Ramona Cross, Drawing

$ 32,700 41,390 8,150 186,000 1,500 2,500 99,950 48,000

Journalize the entries to close the appropriate accounts. ANSWER: Service Revenue Depreciation Expense Insurance Expense Rent Expense Salary Expense Supplies Expense Ramona Cross, Capital Ramona Cross, Capital Ramona Cross, Drawing POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 11:06 AM

186,000 13,500 2,510 32,700 41,390 2,500 93,400 48,000 48,000

Page 121

Chapter 4 - Completing the Accounting Cycle 199. On the basis of the following information taken from the Adjusted Trial Balance columns of the work sheet for the month ended September 30, journalize the closing entries for Perez Roofing Company. Cash Accounts Receivable Office Supplies Repair Parts Machinery Accumulated Depreciation Accounts Payable Notes Payable Sam Perez, Capital Sam Perez, Drawing Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense

22,500 3,575 2,850 3,785 17,750 3,250 1,150 6,500 2,500 1,750 47,200 4,840 1,275 925 1,350 60,600

60,600

ANSWER: Sept. 30 Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense Sam Perez, Capital 30

Sam Perez, Capital Sam Perez, Drawing

47,200 4,840 1,275 925 1,350 38,810 1,750 1,750

POINTS: DIFFICULTY:

Page 122

Chapter 4 - Completing the Accounting Cycle 200. The following adjusted trial balance is the result of the adjustments made at the end of the month of March for Erik Martin Company. Use these adjusted values to journalize the closing entries for Erik Martin Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Erik Martin, Capital Erik Martin, Drawing Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense

24,750 5,750 3,525 4,785 9,750 2,150 3,550 7,500 19,725 6,250 36,500 6,425 1,465 5,150 1,575 69,425

69,425

ANSWER: Mar. 31

Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense Erik Martin, Capital Erik Martin, Capital Erik Martin, Drawing

36,500 6,425 1,465 5,150 1,575 21,885 6,250 6,250

POINTS: DIFFICULTY:

Page 123

Chapter 4 - Completing the Accounting Cycle 201. The following adjusted trial balance is the result of the adjustments made at the end of the month of July for Ladonna Douglas Company. Utilize these adjusted values to perform the closing entries for Ladonna Douglas Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Ladonna Douglas, Capital Ladonna Douglas, Drawing Service Revenue Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense

34,750 9,750 2,525 4,785 10,750 2,150 14,300 11,500 53,725 13,250 41,500 37,425 3,000 2,750 1,465 2,150 575 123,175

123,175

ANSWER: July 31 Service Revenue Ladonna Douglas, Capital Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense 31

Ladonna Douglas, Capital Ladonna Douglas, Drawing

41,500 5,865 37,425 3,000 2,750 1,465 2,150 575 13,250 13,250

POINTS: DIFFICULTY:

Page 124

Chapter 4 - Completing the Accounting Cycle Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Account Title

Dr.

Cash

26,500

Accounts Receivable

5,000

Supplies

8,000

Equipment

18,500

Cr.

26,500 2,000

7,000 7,000

1,000 18,500

Accumulated Depreciation

1,500

Accounts Payable

11,000

3,500

5,000 11,000

1,000

Wages Payable

1,000

8,000

Don Austin, Capital

8,000

2,000

Don Austin, Drawing

2,000 57,500

Fees Earned

2,000

18,000

59,500

1,000

19,000

Supplies Expense

7,000

Depreciation Expense

3,500

Wages Expense

78,000

Cr.

78,000

13,500

84,500

ANSWER: Journal Date

Description

Dec. 31 Fees Earned

Debit

Credit

59,500

Wages Expense

19,000

Supplies Expense

7,000

Depreciation Expense

3,500

Don Austin, Capital

30,000

Dec. 31 Don Austin, Capital Copyright Cengage Learning. Powered by Cognero.

Post. Ref.

2,000

Page 125

Chapter 4 - Completing the Accounting Cycle 2,000

Don Austin, Drawing POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 3:31 PM 203. The following is the adjusted trial balance for Miller Company. Miller Company Adjusted Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 8,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 2,750 Equipment 18 10,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 2,700 Notes Payable 22 1,000 Diane Miller, Capital 31 11,200 Diane Miller, Drawing 32 4,870 Fees Earned 41 36,600 Wages Expense 51 12,450 Rent Expense 52 4,900 Utilities Expense 53 3,475 Depreciation Expense 54 2,150 Miscellaneous Expense 59 1,275 53,700 53,700 Prepare closing entries and the post closing trial balance. ANSWER:

Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Diane Miller, Capital

36,600 12,450 4,900 3,475 2,150 1,275 12,350 Page 126

Chapter 4 - Completing the Accounting Cycle

Diane Miller, Capital Diane Miller, Drawing

4,870 4,870

Miller Company Post-Closing Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 8,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 2,750 Equipment 18 10,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 2,700 Notes Payable 22 1,000 Diane Miller, Capital 31 18,680 24,580 24,580 POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 3:41 PM 204. Reconstruct the adjusting and closing entries from the following.

Prepaid Insurance

Accounts Receivable

1,200

6,000 1,500 7,500

200 1,000

Madison Cox, Capital 7,000 5,280 Copyright Cengage Learning. Powered by Cognero.

Unearned Revenue

Wages Payable

1,350

530

435

530 915

Madison Cox, Drawing 2,100 2,100

Fees Earned 8,000 1,500 Page 127

Chapter 4 - Completing the Accounting Cycle 2,100

0 10,180

435 0

9,935

Wages Expense

Rent Expense

Insurance Expense

Utilities Expense

2,600 530

1,145

200

180

1,145 3,130

200 0

180 0

ANSWER:

Adjusting Entries: 1) Insurance Expense Prepaid Insurance

200

Accounts Receivable Fees Earned

1,500

Unearned Revenue Fees Earned

435

Wages Expense Wages Payable

530

Closing Entries: 1) Fees Earned Wages Expense Rent Expense

200

1,500

435

530

9,935 3,130 1,145

Insurance Expense

200

Utilities Expense

180

Madison Cox, Capital

5,280

Madison Cox, Capital Madison Cox, Drawing

2,100 2,100

POINTS: DIFFICULTY:

Page 128

Chapter 4 - Completing the Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 1/16/2017 3:51 PM 1/25/2017 3:48 PM

DATE CREATED: DATE MODIFIED:

205. Reconstruct adjusting and closing entries for the month ended September 30 from the T accounts below.

Prepaid Insurance

Accounts Receivable

1,350

1,250 275 1,525

130 1,220

Diane Lin, Capital

Unearned Revenue

Wages Payable

1,050

385 385

235 815

Diane Lin, Drawing

7,000

Fees Earned

2,400

580 2,400

5,000 275 235 0

2,400 0 4,020

5,510

Wages Expense

Rent Expense

Insurance Expense

Utilities Expense

3,600 385

1,880

130

1,880 3,985

130 0

95 0

ANSWER:

Adjusting Entries: 1) Insurance Expense Prepaid Insurance

130 130

2) Accounts Receivable Fees Earned

275

3) Unearned Revenue Fees Earned

235

4) Wages Expense Wages Payable

385

Closing Entries: 1) Fees Earned Copyright Cengage Learning. Powered by Cognero.

275

235

385

5,510 Page 129

Chapter 4 - Completing the Accounting Cycle Diane Lin, Capital Wages Expense Rent Expense Insurance Expense Utilities Expense 2) Diane Lin, Capital Diane Lin, Drawing POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 4:00 PM

580 3,985 1,880 130 95 2,400 2,400

Page 130

Chapter 4 - Completing the Accounting Cycle 206. The following are all the steps in the accounting cycle. List them in the order in which they should be done. - Closing entries are journalized and posted to the ledger. - An unadjusted trial balance is prepared. - An optional end-of-period spreadsheet (work sheet) is prepared. - A post-closing trial balance is prepared. - Adjusting entries are journalized and posted to the ledger. - Transactions are analyzed and recorded in the journal. - Adjustment data are assembled and analyzed. - Financial statements are prepared. - An adjusted trial balance is prepared. - Transactions are posted to the ledger. 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled and analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared. 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared. POINTS: 1 DIFFICULTY: Challenging Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/23/2017 1:25 PM ANSWER:

207. 1)

Dana Bowen Company is completing its first year of operations on April 30. Reconstruct the entries for the year ended April 30 from the T accounts below. Record them, assigning letters to each transaction, as follows: a–l Transaction m–r Adjusting journal entries

Balance and prepare the income statement, the statement of owner’s equity, and the balance sheet from the T accounts.

Prepare the closing entries (s–t).

Prepare the post-closing trial balance.

Page 131

Chapter 4 - Completing the Accounting Cycle

Accounts Receivable

Cash 6,500 900

1,250 385

Supplies

Prepaid Insurance

870

1,940 540

725

400 420 1,940 2,500 50 350 930 Accumulated Depreciation

Equipment 2,500

130

Unearned Revenue

Dana Bowen, Capital 930

6,500 2,500

590

Fees Earned 900 1,250 2,500 385 590

Insurance Expense 725

Accounts Payable

Wages Expense 420 225

Depreciation Expense 130

Wages Payable 870

225

Dana Bowen, Drawing 350

Rent Expense 400

Supplies Expense 540

Miscellaneous Expense 50

Page 132

Chapter 4 - Completing the Accounting Cycle

ANSWER:

1) Journal Entries: a) Cash

6,500

Dana Bowen, Capital b) Equipment Dana Bowen, Capital c) Cash Fees Earned d) Rent Expense Cash e) Accounts Receivable Fees Earned f) Supplies Accounts Payable g) Wages Expense Cash h) Prepaid Insurance Cash i) Cash Fees Earned j) Miscellaneous Expense Cash k) Dana Bowen, Drawing Cash l) Cash Unearned Revenue

6,500 2,500 2,500 900 900 400 400 1,250 1,250 870 870 420 420 1,940 1,940 2,500 2,500 50 50 350 350 930 930

Adjusting Entries: m) Supplies Expense Supplies n) Accounts Receivable Fees Earned o) Insurance Expense Prepaid Insurance p) Depreciation Expense Accumulated Depreciation q) Wages Expense Wages Payable r) Unearned Revenue Fees Earned 2)

540 540 385 385 725 725 130 130 225 225 590 590

Dana Bowen Company Income Statement For the Year Ended April 30 Copyright Cengage Learning. Powered by Cognero.

Page 133

Chapter 4 - Completing the Accounting Cycle Fees earned Expenses: Insurance expense Wages expense Supplies expense Rent expense Depreciation expense Miscellaneous expense Total expenses Net income

$5,625 $725 645 540 400 130 50 2,490 $3,135

Dana Bowen Company Statement of Owner’s Equity For the Year Ended April 30 Dana Bowen capital, May 1 $ 0 Investment during the year $9,000 Net income for the year 3,135 Withdrawals (350) Increase in owner’s equity 11,785 $11,785 Dana Bowen, capital, April 30

Dana Bowen Company Balance Sheet April 30

Assets Current assets: Cash $7,670 Accounts receivable 1,635 Supplies 330 Prepaid insurance 1,215 Total current assets Property, plant, and equipment: Equipment $2,500 Less accum. depr. 130 Total property, plant, and equipment Total assets

Liabilities Current liabilities: Accounts payable

$ 870

Wages payable Unearned revenues

225 340

Total liabilities

$1,435

$10,850

Owner’s Equity 2,370

Dana Bowen, capital

11,785

$13,200

Total liabilities and owner’s equity

$13,220

Page 134

Chapter 4 - Completing the Accounting Cycle 3) Closing Entries: s) Fees Earned Wages Expense Rent Expense Supplies Expense Insurance Expense Depreciation Expense Miscellaneous Expense Dana Bowen, Capital t) Dana Bowen, Capital Dana Bowen, Drawing

5,625 645 400 540 725 130 50 3,135 350 350

4) Dana Bowen Company Post-Closing Trial Balance For the Year Ended April 30

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Accounts Payable Wages Payable Unearned Revenue Dana Bowen, Capital

Account Debit Credit No. Balances Balances 11 7,670 12 1,635 13 330 14 1,215 18 2,500 19 130 21 870 22 225 24 340 31 11,785 13,350 13,350

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 2/21/2017 4:13 PM Copyright Cengage Learning. Powered by Cognero.

Page 135

Chapter 4 - Completing the Accounting Cycle 208. Kirk Enterprises offers rug cleaning services to business clients. Below is the trial balance for Kirk Enterprises, which was prepared on the end-of-period spreadsheet (work sheet) for the year ended July 31.

Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31

Cash Prepaid Insurance Fees Receivable Supplies Equipment Accumulated Depreciation Unearned Revenue Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Unadjusted Trial Balance Dr. Cr. 36 12 56 12 60 12

Adjustments Dr.

Cr.

Adjusted Trial Balance Dr. Cr.

20 32 84 4 80 28 20

228

Required Enter the adjustment data in the work sheet for the transactions shown below and place the balances in the Adjusted Trial Balance columns. Adjustments: a) The equipment is estimated to last for five years with no salvage value. The asset will be depreciated evenly over its useful life. Record one month’s depreciation. b) Accrued wages, $2. c) Unused supplies on hand, $8. d) Of the unearned revenue, 75% has been earned. e) Unexpired insurance remaining at the end of the month, $9. ANSWER: Kirk Enterprises End-of-Period Spreadsheet Copyright Cengage Learning. Powered by Cognero.

Page 136

Chapter 4 - Completing the Accounting Cycle

For the Year Ended July 31 Unadjusted Adjusted Adjustments Trial Balance Trial Balance Dr. Cr. Dr. Cr. Dr. Cr. 36 36 12 56

(e) 3

9 56

12 60

8 60

(a) 1

20 (d) 15

32 2

(b) 2 84

4 80

28 20

228

(d) 15

(b) 2

28 22

(e) 3

(a) 1

1 231

228

231

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

Page 137

Chapter 4 - Completing the Accounting Cycle

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:51 PM 2/21/2017 4:16 PM

209. Kirk Enterprises offers rug cleaning services to business clients. Below are the adjustments data for the year ended July 31. Using this information along with the spreadsheet below, record the adjusting entries in proper general journal form. Adjustments: (a) The equipment is estimated to last for five years with no salvage value. The asset will be depreciated evenly over its useful life. Record one month’s depreciation. (b) Accrued wages, $2. (c) Unused supplies on hand, $8. (d) Of the unearned revenue, 75% has been earned. (e) Unexpired insurance remaining at the end of the month, $9. Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31 Unadjusted Trial Balance

Cr.

Dr. Cash

Prepaid Insurance

Fees Receivable

Supplies

Equipment

Accumulated Depreciation

Unearned Revenue

Accounts Payable

Adjustments

Adjusted Trial Balance

Dr.

Cr.

Wages Payable 84

Ruben Ramon, Capital Ruben Ramon, Drawing

4 80

Service Revenue Advertising Expense

Wages Expense

Insurance Expense Supplies Expense Depreciation Expense 228

228

ANSWER: Journal Copyright Cengage Learning. Powered by Cognero.

Page 1 Page 138

Chapter 4 - Completing the Accounting Cycle Date

Description Adjusting Entries

(a)

Depreciation Expense

Post. Ref.

Debit

Credit 1

Accumulated Depreciation (b)

Wages Expense

1 2

Wages Payable (c)

Supplies Expense

2 4

Supplies (d)

Unearned Revenue

4 15

Service Revenue (e)

Insurance Expense Prepaid Insurance

15 3 3

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 4:25 PM

Page 139

Chapter 4 - Completing the Accounting Cycle 210. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $630,430 and a credit total of $614,210. This is before the amount for net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet, what is the amount of net income or net loss? ANSWER: RATIONALE:

Net income, $16,220 Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $630,430 – $614,210 = $16,220 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/26/2017 9:15 AM DATE MODIFIED: 2/21/2017 4:25 PM 211. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $614,210 and a credit total of $630,430. This is before the amount for net income or net loss has been included. In preparing the income statement from the work sheet, what is the amount of net income or net loss? ANSWER: RATIONALE:

Net loss, $16,220 Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $614,210 – $630,430 = $(16,220) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/26/2017 9:20 AM DATE MODIFIED: 2/21/2017 4:25 PM 212. Austin Enterprises was started by Daniel Austin. During the current year, Daniel Austin invested $8,000 in the business. Based on the following end-of-period spreadsheet, prepare an income statement, statement of owner’s equity, and balance sheet for Austin Enterprises for the year ended December 31. Austin Enterprises Copyright Cengage Learning. Powered by Cognero.

Page 140

Chapter 4 - Completing the Accounting Cycle End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Balance Income Statement Account Title Dr. Cr. Dr. Cr. Cash 26,500 Accounts Receivable 7,000 Supplies 1,000 Equipment 18,500 Accumulated Depr.—Equip. 5,000 Accounts Payable 11,000 Wages Payable 1,000 Daniel Austin, Capital 8,000 Daniel Austin, Drawing 2,000 Fees Earned 59,500 59,500 Wages Expense 19,000 19,000 Rent Expense 7,000 7,000 Depreciation Expense 3,500 3,500 84,500 84,500 29,500 59,500 Net income 30,000 59,500 59,500

Balance Sheet Dr. Cr. 26,500 7,000 1,000 18,500 5,000 11,000 1,000 8,000 2,000

55,000 55,000

25,000 30,000 55,000

Austin Enterprises Income Statement For the Year Ended December 31

ANSWER:

Fees earned Expenses: Wages expense Rent expense Depreciation expense Total expenses Net income

$59,500 $19,000 7,000 3,500 29,500 $30,000

Austin Enterprises Statement of Owner’s Equity For the Year Ended December 31 Daniel Austin, capital, January 1 $0 Investment during the year $ 8,000 Net income for the year 30,000 Withdrawals (2,000) Increase in owner’s equity 36,000 $36,000 Daniel Austin, capital, December 31 Austin Enterprises Balance Sheet December 31 Copyright Cengage Learning. Powered by Cognero.

Page 141

Chapter 4 - Completing the Accounting Cycle Assets Current assets: Cash Accounts receivable Supplies Total current assets Property, plant, and equipment: Equipment Less accum. depr. Total property, plant, and equipment

Total assets

Liabilities Current liabilities: Accounts payable $11,000 Wages payable 1,000 Total liabilities $12,000

$26,500 7,000 1,000 $34,500

$18,500 5,000

Owner’s Equity

Daniel Austin, 13,500 capital Total liabilities and owner’s $48,000 equity

36,000

$48,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/26/2017 9:27 AM DATE MODIFIED: 2/21/2017 4:29 PM 213. The balances in the ledger of Good Landscape Services as of January 31 before adjustments are as follows: Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation

$ 6,750 3,900 8,400 41,750 9,950

Dalton Good, Capital Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense

$29,775 3,425 56,300 24,300 6,000 1,500

Adjustment data are as follows: supplies on hand, January 31, $900; insurance expired for January, $1,100; depreciation on equipment for January, $1,600; salaries accrued, January 31, $1,650. Copyright Cengage Learning. Powered by Cognero.

Page 142

Chapter 4 - Completing the Accounting Cycle (a)

Prepare a 10-column end-of-period spreadsheet for Good Landscape Services for January.

(b)

On the basis of the work sheet in (a), present the following in good order: (1) income statement, (2) statement of owner's equity (assume no additional owner investments were made during the month), and (3) balance sheet.

(c)

On the basis of the work sheet in (a) journalize the closing entries as of January 31.

ANSWER:

(a) Good Landscape Services End-of-Period Spreadsheet For the Month Ended January 31 Unadjusted Trial Balance Dr. Cr.

Account Title Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation

6,750 3,900 8,400 41,750

Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense

3,425

Adjustments Dr. Cr.

(a) 3,000 (b) 1,100

29,775 56,300 24,300 6,000 1,500 . . 96,025 96,025

Supplies Expense Insurance Expense Depreciation Expense Salaries Payable

(d) 1,650

(a) 3,000 (b) 1,100 (c) 1,600 7,350

d) 1,650 7,350

Net income Adjusted Trial Balance Dr. Cr. 6,750 900 7,300 41,750

Income Statement Dr. Cr.

Balance Sheet Dr. Cr. 6,750 900 7,300 41,750

11,550 29,775 3,425 Copyright Cengage Learning. Powered by Cognero.

3,425

11,550 29,775 . Page 143

Chapter 4 - Completing the Accounting Cycle 56,300 25,950 6,000 1,500 3,000 1,100 1,600

56,300 25,950 6,000 1,500 3,000 1,100 1,600

1,650 99,275

99,275

39,150 17,150 56,300

56,300

60,125

56,300

60,125

1,650 42,975 17,150 60,125

(b) (1) Good Landscape Services Income Statement For the Month Ended January 31 Service revenue Expenses: Salary expense Rent expense Supplies expense Depreciation expense Supplies expense Insurance expense Miscellaneous expense Total expenses Net income

$56,300 $25,950 6,000 3,000 1,600 3,000 1,100 1,500 39,150 $17,150

(b) (2) Good Landscape Services Statement of Owner's Equity For the Month Ended January 31 Dalton Good, capital, January 1 Net income for the month Withdrawals Increase in owner's equity Dalton Good, capital, January 31

$29,775 $17,150 (3,425) 13,725 $43,500

(b) (3) Good Landscape Services Balance Sheet January 31 Assets Current assets: Copyright Cengage Learning. Powered by Cognero.

Liabilities Current liabilities: Page 144

Chapter 4 - Completing the Accounting Cycle Cash

$6,750

Supplies

900

Prepaid insurance

Salaries payable

$1,650

7,300

Total current assets

$14,950

Owner's Equity 43,500

Total liabilities and owner's equity

$45,150

Property, plant, and equipment:

Dalton Good, capital

Equipment

$41,750

Less accum. depr.

11,550

Total property, plant, and equipment

30,200

Total assets

$45,150

Closing Entries: Service Revenue Salary Expense Rent Expense Supplies Expense Depreciation Expense Insurance Expense Miscellaneous Expense Dalton Good, Capital Dalton Good, Capital Dalton Good, Drawing

56,300 25,950 6,000 3,000 1,600 1,100 1,500 17,150 3,425 3,425

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/26/2017 10:13 AM 214. Complete the following end-of-period spreadsheet for Danilo Enterprises. Copyright Cengage Learning. Powered by Cognero.

Page 145

Chapter 4 - Completing the Accounting Cycle

Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash

Adjusted Trial Balance

Income Statement

Balance Sheet

Dr. 14,500

Dr.

Accounts Receivable

7,500

Supplies

500

Equipment

20,500

Cr.

Accumulated Depr.— Equip.

15,000

Accounts Payable

9,500

Wages Payable

3,060

Tony Danilo, Capital

18,240

Tony Danilo, Drawing

Cr.

1,000 34,000

Fees Earned Wages Expense

18,000

Rent Expense

9,300

Depreciation Expense

8,500 79,800

79,800

Net loss ANSWER:

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr.—Equip. Copyright Cengage Learning. Powered by Cognero.

Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Income Balance Sheet Balance Statement Dr. Cr. Dr. Cr. Dr. Cr. 14,500

14,500

7,500 500 20,500

7,500 500 20,500 15,000

15,000 Page 146

Chapter 4 - Completing the Accounting Cycle Accounts Payable Wages Payable Tony Danilo, Capital Tony Danilo, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense Net loss

9,500

3,060

18,240

1,000

1,000 34,000

18,000 9,300

34,000 18,000 9,300

8,500 _____ 8,500 79,800 79,800 35,800 34,000 44,000 45,800 1,800 1,800 35,800 35,800 45,800 45,800

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 4:54 PM

Page 147

Chapter 4 - Completing the Accounting Cycle 215. Explain how net income or loss is determined by using the end-of-period spreadsheets. ANSWER:

The difference between the debits and credits of the Income Statement columns is compared to the difference between the debits and credits of the Balance Sheet columns. They should be the same amounts but opposite from each other. If the debits are more than the credits in the Income Statement columns, signifying a net loss, then the credits should be higher than the debits in the Balance Sheet columns by the same amount. If the credits are more than the debits in the Income Statement columns, signifying a net income, then the debits should be higher than the credits in the Balance Sheet columns by the same amount. POINTS: 1 DIFFICULTY: Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 5:03 PM 216. If end-of-period spreadsheets are not considered part of the formal accounting records, why are they used? ANSWER:

The end-of-period spreadsheets are tools used by accountants to collect and summarize data for various analysis and reports. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:51 PM DATE MODIFIED: 1/25/2017 5:06 PM 217. Sean Enterprises offers carpet and upholstery cleaning services to residential clients. Below is a partial end-ofperiod spreadsheet for the year ended December 31. Record the necessary reversing entries on January 1 in proper general journal form. Sean Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Unadjusted Copyright Cengage Learning. Powered by Cognero.

Adjusted Trial Page 148

Chapter 4 - Completing the Accounting Cycle Trial Balance

Adjustments

Account Title

Dr.

Cash

9,850

Accounts Receivable

8,500

Prepaid Insurance

3,400

425

2,975

Supplies

4,700

4,350

350

Equipment

100,000

Cr.

Dr.

Cr.

9,850 350

8,850

100,000

Accumulated Depreciation

10,000

Accounts Payable

3,600

10,000

20,000 3,600

Wages Payable

1,600

Ruben Ramon, Capital Ruben Ramon, Drawing

Balance

1,600

40,000

12,000

Service Revenue

125,600

Advertising Expense

2,350

Wages Expense

38,400

350

125,950 2,350

1,600

40,000

Insurance Expense

425

Supplies Expense

4,350

Depreciation Expense

10,000

179,200

ANSWER: Date Jan. 1

16,725

191,150

Journal Description Reversing Entries Wages Expense Wages Payable Service Revenue Accounts Receivable

191,150

Debit

Page 1 Credit

1,600 1,600 350 350

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Copyright Cengage Learning. Powered by Cognero.

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Chapter 4 - Completing the Accounting Cycle DATE CREATED: DATE MODIFIED:

1/26/2017 9:49 AM 2/21/2017 4:30 PM

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Chapter 5 - Accounting Systems True / False 1. The methods and procedures for collecting, classifying, summarizing, and reporting a business's financial and operating information are called the accounting system. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 3/7/2017 11:27 AM 2. Systems analysis is the final phase in the creation or revision of an accounting system. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 3. Processing methods are the means by which the system collects, summarizes, and reports accounting information. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 4. Accounting systems evolve through a three-step process: analysis, design, and feedback. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 5. An accounting system design consists of internal controls and information processing methods. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 6. Most accounting systems evolve as the business grows and requires changes in its methods for collecting, accumulating, and reporting information. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 7. Once an accounting system has been implemented, feedback will be used to continuously analyze and improve the system. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 8. Designing a system to meet user needs is the final phase in the creation or revision of an accounting system. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 9. When specialized journals are used, the general journal is not necessary. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 10. Specialized journals are books of original entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 11. Transactions must first be recorded in the general journal before they can be entered in specialized journals. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/27/2017 11:15 AM 12. The format and number of specialized journals that a business uses depend upon the legal organization of the business. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 13. The basic procedure of posting from a revenue journal is to make all postings at the end of the month. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 14. The principal ledger that contains all the balance sheet and income statement accounts is the general ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 15. The presence of a subsidiary ledger requires the presence of a summarizing control account in the general ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 17. The customers subsidiary ledger is controlled by the general ledger account entitled Accounts Payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 18. When a sale for $1,350 takes place with a $250 deposit having been received in advance, only the $1,100 on account is recorded in the revenue journal. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Amount Recorded in the Revenue Journal = $1,350 – $250 = $1,100 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 19. Even when special journals are used, purchases of store equipment on account are recorded in the general journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 20. A control account is used to record the details of the individual subsidiary accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 21. A cash refund paid to a customer who overpaid an account receivable is recorded in the cash payments journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 22. Even when special journals are used, a personal withdrawal of cash is recorded in the general journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 23. Services provided for cash are recorded in the revenue journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 24. Services provided on account are recorded in the revenue journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 25. Sales of office supplies for cash, at cost, to a neighboring business as an accommodation are recorded in the revenue journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 26. The Other Accounts column in the cash receipts journal is used for recording debits to any account for which there is no special debit column. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 27. The Other Accounts column in the cash payments journal is used for recording debits to any account for which there is no specialized debit column. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 28. Purchases journals will have an Other Accounts Cr. column. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 29. The use of subsidiary ledgers is limited to Accounts Payable and Accounts Receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 30. The revenue journal is designed for the efficient recording of cash sales transactions. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 31. The Post. Ref. column of the revenue journal will reference the account number of the customer. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 32. The total of the accounts receivable subsidiary accounts and the balance of the accounts receivable control account should equal each other at the end of the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 33. Adjusting journal entries are recorded in a special journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 34. Even when special journals are used, closing journal entries are recorded in the general journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 35. The accounts receivable subsidiary ledger is an example of a special journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 36. Posting from a revenue journal to the customer account is normally done only at the end of the month. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 37. The purchase of supplies for cash would be recorded in the purchases journal. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 38. When a large number of individual accounts with a common characteristic are grouped together in a separate ledger, the summarizing account in the general ledger is called a control account. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 39. The customers ledger and the creditors ledger refer to subsidiary ledgers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 40. The total on the "Accounts Payable Creditor Balances" report at January 31, the end of the first month of operations, agrees with the total of the Accounts Payable Dr. column in the cash payments journal for the same period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 41. The columns included in special journals are standardized for all businesses. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 42. Generally, subsidiary ledgers are used for general ledger accounts that consist of a large number of individual items. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 43. In a computerized accounting system, all postings happen automatically at the end of the month. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 44. In computerized accounting systems, reports may be generated at any time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 45. Computerized accounting systems prevent all journalizing errors. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 46. Using the Internet to perform business transactions is called e-commerce. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 47. The term B2C refers to transactions conducted between two companies. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 48. E-commerce provides additional business opportunities but at the cost of reduced speed and efficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 49. One way to report revenue earned by a company is to present it by the different segments of business. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 50. Businesses can only be segmented by type of customer. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/27/2017 11:50 AM DATE MODIFIED: 1/27/2017 11:52 AM

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Chapter 5 - Accounting Systems Multiple Choice 51. A(n) ____ system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. a. accounting b. fiduciary c. operations d. auditing ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/27/2017 11:53 AM 52. The phase of accounting system installation in which the information needs of people in the organization are taken into account is a. analysis b. design c. implementation d. installation ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 53. Which of the following is not one of the three phases needed when changing an accounting system, either in its entirety or in part? a. analysis b. design c. review d. implementation ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 54. Which of the following is not part of a three-step process that a growing business uses for the evolution of its accounting system? a. analysis b. design c. implementation d. feedback ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 55. The three phases of setting up an accounting system in correct order are a. design, implementation, analysis b. analysis, design, implementation c. design, analysis, implementation d. implementation, design, analysis ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/27/2017 11:55 AM 56. The goal of systems design is to a. determine when to implement a system b. meet user needs c. determine the size of the competitor's system d. make changes to the present system ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 57. After an accounting system has been set up, what is the next step? a. Create the chart of accounts. b. Obtain input from users to analyze and improve the system. c. Implement analysis and design. d. Set up internal controls. ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 9:30 AM 58. Processing methods a. are the policies and procedures that protect assets from misuse b. must be computerized c. are the means by which the accounting system collects, summarizes, and reports accounting information d. ensure that business laws and regulations are followed ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 59. The means by which the accounting system collects, summarizes, and reports accounting information is called information a. reporting methods b. accounting methods c. control methods d. processing methods ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 60. The primary ledger containing all the balance sheet and income statement accounts is the a. general ledger b. creditors ledger c. customers ledger d. subsidiary ledger ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 61. The subsidiary ledger that includes customer account activity is called the a. asset ledger b. accounts payable ledger c. expense ledger d. accounts receivable ledger ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 62. Every controlling account must have its own a. revenue ledger b. general ledger c. subsidiary ledger d. journal ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

Page 31

Chapter 5 - Accounting Systems 63. At the end of the month, the total of the amount column of the revenue journal is posted as a a. debit to Accounts Receivable and a credit to Cash b. debit to Accounts Receivable and a credit to Fees Earned c. debit to Cash and a credit to Fees Earned d. debit to Cash and a credit to Accounts Payable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 64. The controlling account in the general ledger that summarizes the individual customer accounts in the subsidiary ledger is entitled a. Purchases b. Accounts Payable c. Fees Earned d. Accounts Receivable ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.5-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 65. When there are a large number of individual accounts with a common characteristic, it is common to place them in a separate ledger called a(n) a. general ledger b. income statement ledger c. group ledger d. subsidiary ledger ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 66. A purchase of supplies for cash is recorded in the a. revenue journal b. purchases journal c. cash receipts journal d. cash payments journal ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 67. A purchase of supplies on account is recorded in the a. revenue journal b. general journal c. purchases journal d. cash payments journal ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 68. Which of the following transactions is recorded in the purchases journal? a. purchase of store supplies on account b. return of damaged office equipment c. purchase of store supplies for cash d. purchase of office equipment for cash ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 69. When posting column totals in the purchases journal, a credit should be posted to a. Merchandise Inventory b. Accounts Payable c. Sales Returns and Allowances d. Cash ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 70. In which journal would an adjustment for an overcharge by a creditor be recorded? a. general journal b. purchases journal c. cash payments journal d. cash receipts journal ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 71. Which of the following transactions is recorded in the revenue journal? a. sale of excess office equipment for cash b. rendering services for cash c. rendering services on account d. sale of excess office equipment on account ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 72. Each individual entry in the revenue journal is posted to the a. accounts receivable controlling account b. accounts receivable subsidiary ledger c. revenue controlling account d. accounts receivable subsidiary ledger and the controlling account ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 73. Which of the following is always recorded in the general journal? a. services rendered for cash b. correction of error in billing client c. purchases of equipment on account d. purchases of equipment for cash ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 74. Which of the following is always recorded in the general journal? a. rendering services for cash b. purchases of supplies on account c. rendering services on account d. closing entries ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 75. Which of the following is recorded in the cash receipts journal? a. cash withdrawn by the owner b. cash purchase of equipment c. cash received on customer's account d. adjusting entry for depreciation ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 77. Which of the following is recorded in the cash payments journal? a. adjusting entry for accrued salaries b. receipt of cash on supplies returned c. receipt of cash from services rendered d. payment of employees' salaries ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 78. A cash payments journal would not include a(n) a. Cash Cr. column b. Sales Discounts Cr. column c. Accounts Payable Dr. column d. Other Accounts Dr. column ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/27/2017 1:18 PM

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Chapter 5 - Accounting Systems 79. In which journal is the return of supplies purchased on account recorded? a. general journal b. cash receipts journal c. cash payments journal d. purchases journal ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 80. A cash purchase of supplies should be recorded in the a. cash receipts journal b. purchases journal c. general journal d. cash payments journal ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:12 AM

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Chapter 5 - Accounting Systems 81. When posting the column totals of a cash payments journal, a debit should be posted to a. Cash b. Accounts Payable c. Sales Discounts d. Unearned Revenue ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 82. In which journal is the receipt of a promissory note from a customer on account recorded? a. revenue journal b. cash receipts journal c. general journal d. purchases journal ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 83. Subsidiary ledgers a. are used only for Accounts Payable and Accounts Receivable b. may be used for various general ledger accounts c. may be used only for the cash account d. are never used for more than four accounts ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:13 AM 84. Some of the more common subsidiary ledgers are a. accounts payable, accounts receivable, and owner’s equity subsidiary ledgers b. accounts receivable and accounts payable subsidiary ledgers c. accounts receivable, accounts payable, cash, checking, petty cash, and owner’s equity subsidiary ledgers d. cash and owner’s equity subsidiary ledgers ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 85. If the individual subsidiary ledger accounts contained the following data: Cadence Company, Vendor, $200, credit balance Franklin Enterprises, Customer, $750, debit balance Marcelo Construction, Client, $125, debit balance Peyton Supplies, Supplier, $375, credit balance The accounts receivable (A/R) control account and the accounts payable (A/P) control account balances would be a. A/R, $1,375; A/P, $375 b. A/R, $525; A/P, $175 c. A/R, $875; A/P, $575 d. A/R, $750; A/P, $700 ANSWER: RATIONALE:

c A/R Cadence Company, Vendor,$200, credit balance

$ 200

Franklin Enterprises, Customer, $750, debit balance

$750

Marcelo Construction, Client, $125, debit balance

125

Peyton Supplies, Supplier, $375, credit balance Total

A/P

375 $875

$575

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 9:31 AM

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Chapter 5 - Accounting Systems 86. Which of the following is not considered a special journal? a. purchases journal b. cash receipts journal c. general journal d. cash payments journal ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 87. Which of the following journals is called an all-purpose journal? a. general journal b. purchases journal c. revenue journal d. accounting journal ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 88. Which of the following is true about the revenue journal? a. Cash revenues and revenues on account are recorded in the revenue journal. b. Only cash revenues are recorded in the revenue journal. c. Only revenues on account are recorded in the revenue journal. d. Unearned revenues are also recorded in the revenue journal. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 89. The cash receipts journal will be used for a. only cash received from customers on account b. all cash received for any purpose c. cash received from customers on account and cash sales d. only cash received from cash sales ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 90. An “Accounts Receivable Customer Balances” report shows a. revenues by customer for a specified date range b. customer balances owed as of a specific date c. cash payments to creditors for a specific date range d. sales by customer as of a specific date ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 91. A cash investment made by the owner should be recorded in the a. cash receipts journal b. purchases journal c. cash payments journal d. revenue journal ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 92. A withdrawal of cash made by the owner will be found in the a. cash receipts journal b. cash payments journal c. revenue journal d. purchases journal ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 93. An owner transfers a personal automobile to the company with a fair market value of $12,000. The entry will be made in the a. purchases journal b. cash payments journal c. cash receipts journal d. general journal ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 94. In which journal would adjusting entries be found? a. cash receipts journal b. cash payments journal c. general journal d. purchases journal ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 95. In which journal would you find cash revenues recorded? a. cash payments journal b. general journal c. revenues journal d. cash receipts journal ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 96. In which journal would the payment of salaries be posted? a. cash receipts journal b. special journal c. cash payments journal d. expense journal ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 97. The following cash receipts journal headings have been suggested for Tower Tree-Trimming Service Company. Which of the following statements is false? Date

Account Debited

Post. Ref.

Accounts Cash Receivable Cr. Cr.

Other Accounts Dr.

a. The second column should be Account Credited. b. The Cash column should be a debit. c. The Other Accounts column should be a credit. d. The Accounts Receivable column should be a debit. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:18 AM 98. Which of the following is not a special journal? a. cash receipts journal b. purchases journal c. accounts receivable journal d. cash payments journal ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems 99. Which of the following general ledger accounts normally has a subsidiary ledger? a. Owner's Capital b. Drawing c. Supplies d. Accounts Payable ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:22 AM 100. Which transaction is normally recorded in a special journal? a. sales returns b. depreciation expense c. purchases on account d. credit from supplier for return of supplies purchased on account ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 101. An adjustment resulting from a creditor reducing the amount owed on an unpaid invoice due to an invoicing error would be recorded in the a. general journal b. purchases journal c. cash payments journal d. cash receipts journal ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 102. If a company uses special journals, a. it must have one for cash, receivables, and payables b. it may have no more than four c. the quantity and design depend on the needs of the company d. the design must comply with the FASB requirements ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 103. Mocha Coffee Shop has asked the accountant to keep track of the purchases for beverage, food, and retail items. The accountant has implemented a purchases journal. Which of the following columns should be included in the new purchases journal? a. Accounts Payable Cr., Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr. b. Accounts Payable Dr., Other Accounts Dr., Beverage Supplies Cr., Food Supplies Cr., Retail Items Cr. c. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr., Cash Cr. d. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Cr., Accounts Payable Dr. ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:31 AM 104. When using a purchases journal, a. all cash and credit purchases are recorded in the journal b. posting to creditor accounts is only done at the end of the month c. the “Other Accounts” total is posted to Accounts Payable at month’s end d. there will always be an “Accounts Payable Cr.” column ANSWER: POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 105. When using a revenue journal, a. separate “Fees Earned” and “Accounts Receivable” columns are included b. both cash sales and sales on account are recorded in the journal c. revenues are normally recorded when the company sends customer invoices d. postings to customer accounts are done at month's end ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:39 AM 106. Beachside Coffee Shop, in an effort to streamline its accounting system, has decided to utilize a cash receipts journal in its operations. If the company records the cash sale of food for $18, which is the correct entry? a. Cash Cr., $18; Food Revenue Dr., $18 b. Cash Dr., $18; Food Revenue Dr., $18 c. Cash Dr., $18; Food Revenue Cr., $18 d. Cash Cr., $18; Food Revenue Cr., $18 ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 107. A basic manual accounting system includes all of the following except a a. chart of accounts b. two-column journal c. general ledger d. computer on which the system runs ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:46 AM 108. Which of the following statements is false? a. Most computerized accounting systems use principles from manual systems. b. Subsidiary ledgers and special journals are only useful when a business doesn’t have a large number of similar transactions. c. Even small companies use computerized accounting systems. d. Large companies often integrate their accounting system with their automated business systems. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 109. A computerized accounting system will not allow which of the following types of journalizing errors? a. entering an amount in an incorrect account b. reversing the debit and credit accounts in a transaction c. processing a transaction that has unequal debits and credits d. entering a transaction with an incorrect date ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:50 AM 110. Computerized accounting systems a. are only used by medium- and large-sized companies b. are generally not as accurate as manual systems c. record and post transactions at the same time d. must make use of special journals ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 111. The total on the "Cash Receipts" report generated by QuickBooks® software at January 31 would be equal to the a. total revenue earned for the month of January b. total of the purchases journal on January 31 c. total of the Cash Dr. column of the cash receipts journal in a manual system d. balance in Accounts Receivable at January 31 ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:52 AM 112. Put the following into the correct order for processing a sale on account with QuickBooks®. A. Prepare reports. B. Record the sale by completing an electronic invoice form. C. Record collection of payment by completing a "receive payment" form. a. B-C-A b. A-B-C c. B-A-C d. C-B-A ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:54 AM

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Chapter 5 - Accounting Systems 113. Which of the following is not an advantage of a computerized system over a manual system? a. Transactions are recorded and posted at the same time. b. Accuracy is usually better with a computerized system. c. Current balances are always available. d. Internal controls are optional to the computerized system. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 114. Month-end postings to control accounts in a computerized accounting system are not required because a. control accounts are not used in computerized systems b. transactions are posted to accounts immediately c. the input operator can choose to post to accounts at any time d. transactions are posted at the end of the financial year ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 115. Computerized accounting systems a. provide a tedious form of record keeping b. improve the timeliness of reporting c. prevent all journalizing errors d. are only used in medium and large businesses ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 116. What is meant by the term B2C? a. balance to cash b. business to cash c. book to capital d. business to consumer ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 117. In addition to B2B and B2C transactions, the Internet is commonly used in all of the following business activities except a. supply chain management b. regulatory compliance management c. customer relationship management d. product life-cycle management ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 STATE STANDARDS: United States - AK - AICPA BB Leveraging ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 10:06 AM 118. When Richard Miller purchases a fishing pole through Amazon.com, he is utilizing a. B1C e-commerce b. B2B e-commerce c. B2C e-commerce d. B1B e-commerce ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 10:07 AM

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Chapter 5 - Accounting Systems 119. Which of the following is not an area where the Internet is used for business purposes? a. b usiness cycle management b. c ustomer relationship management c. s upply chain management d. p roduct life-cycle management ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.AICPA.FN.02 - Leveraging Technology BUSPROG: Technology DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 120. E-commerce a. accounts for less than 1% of all retail sales b. only relates to transactions between a company and a consumer c. can improve the speed and efficiency of transactions d. increases paperwork ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 121. Business may be segmented by all of the following except a. region b. product line c. customer type d. time period ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:56 AM

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Chapter 5 - Accounting Systems 122. Connie's Specialties Inc. offers exclusive interior design services. The following revenue information was determined from Connie's records. Current Year Prior Year Consultation services $1,000,000 $ 800,000 Design services 1,800,000 1,500,000 Using a horizontal analysis, which is correct? a. Consultation services showed an increase in revenue of 25%. b. Consultation services showed a decrease in revenue of 25%. c. Design services showed an increase in revenue of 25%. d. Design services showed a decrease in revenue of 25%. ANSWER: RATIONALE:

a Percentage Change in Revenues from Consultation Services = (Revenue in Current Year – Revenue in Previous Year)/Revenue in Previous Year = ($1,000,000 – $800,000)/$800,000 = 25% Consultation services showed an increase in revenue of 25%. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 9:58 AM

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Chapter 5 - Accounting Systems 123. Segment data a. can be used for vertical, but not horizontal analysis b. is gathered from invoices entered into the accounting system c. is only useful by product line d. analysis is required by GAAP ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 124. Waller Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 80,000 $100,000 South 260,000 200,000 Total revenues $340,000 $300,000 Using horizontal analysis, determine the percentage change in revenues for the North region. Round to one decimal place. a. 22.4% b. (20.0)% c. 20.0% d. (22.4)% ANSWER: RATIONALE:

b Percentage Change in Revenues for the North Region = (Revenue in Current Year – Revenue in Prior Year)/Revenue in Prior Year = ($80,000 – $100,000)/$100,000 = (20.0)%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 10:13 AM

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Chapter 5 - Accounting Systems 125. Snelling Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 75,000 $100,000 South 260,000 220,000 Total revenues $335,000 $320,000 Using horizontal analysis, determine the percentage change in revenues for the South region. Round to one decimal place. a. 18.2% b. 84.6% c. (18.2)% d. 15.4% ANSWER: RATIONALE:

a Percentage Change in Revenues for the South Region = (Revenue in Current Year – Revenue in Prior Year)/Revenue in Prior Year = ($260,000 – $220,000)/$220,000 = 18.2% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 10:23 AM

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Chapter 5 - Accounting Systems 126. The following is an example of

Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year $ 78,000 129,000 105,000 $312,000

Prior Year $ 55,000 115,000 121,000 $291,000

Increase (Decrease) Amount Percent $ 23,000 41.8% 14,000 12.2 (16,000) (13.2) $ 21,000 7.2

a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 9:31 AM

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Chapter 5 - Accounting Systems 127. The following is an example of

Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year Amount Percent $ 78,000 25.0% 129,000 41.3 105,000 33.7 $312,000 100.0%

Prior Year Amount Percent $ 55,000 18.9% 115,000 39.5 121,000 41.6 $291,000 100.0%

a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 11:07 AM Matching Match the transactions below with the journal or ledger in which it would be entered. a. Purchases journal b. Revenue journal c. Cash receipts journal d. Cash payments journal e. Accounts receivable subsidiary ledger f. Accounts payable subsidiary ledger g. General journal DIFFICULTY:

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Chapter 5 - Accounting Systems ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 11:59 AM 128. Monthly adjustment for supplies used ANSWER: g POINTS: 1 129. Cash receipt posting to an individual customer account ANSWER: e POINTS: 1 130. Record sale on account to customer ANSWER: b POINTS: 1 131. Record purchase on account from vendor ANSWER: a POINTS: 1 132. Record payment received from customer ANSWER: c POINTS: 1 133. Record payment made to vendor ANSWER: d POINTS: 1 134. Cash payment posting to an individual vendor account ANSWER: f POINTS: 1

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Chapter 5 - Accounting Systems Match the following types of journal transactions with the journal in which they would be entered. a. Cash receipts journal b. Cash payments journal c. Revenue journal d. Purchases journal e. General journal DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 12:06 PM 135. Sale on account ANSWER: c POINTS: 1 136. Payment for supplies bought on account ANSWER: b POINTS: 1 137. Adjusting entry ANSWER: e POINTS: 1 138. Collection on account ANSWER: a POINTS: 1 139. Equipment purchased on account ANSWER: d POINTS: 1

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Chapter 5 - Accounting Systems Match each subsidiary ledger and general ledger posting to one of the descriptions of activities (a−e). a. Purchases on account b. Collections from customers on account c. Adjustment for expired insurance d. Payments to creditors on account e. Sales on account DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 12:08 PM 140. Accounts receivable subsidiary ledger/Accounts Receivable Dr. ANSWER: e POINTS: 1 141. Accounts receivable subsidiary ledger/Accounts Receivable Cr. ANSWER: b POINTS: 1 142. Accounts payable subsidiary ledger/Accounts Payable Cr. ANSWER: a POINTS: 1 143. Accounts payable subsidiary ledger/Accounts Payable Dr. ANSWER: d POINTS: 1 144. No subsidiary ledger posting ANSWER: c POINTS: 1 The transactions completed by Franklin Company during January, its first month of operations, are listed below. Assume that Franklin Company uses the following journals: cash receipts (CR), cash payments (CP), revenue (R), purchases (P), and general (G). Assume that it uses accounts receivable and accounts payable subsidiary ledgers as well as a general ledger. Indicate by letters which journal would be used for each transaction and whether or not the entry requires a posting to a subsidiary ledger. a. CR, no subsidiary posting b. CP, no subsidiary posting c. R, no subsidiary posting Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems d. P, no subsidiary posting e. G, no subsidiary posting f. CR, subsidiary posting g. CP, subsidiary posting h. R, subsidiary posting i. P, subsidiary posting j. G, subsidiary posting DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 145. Issued check for rent ANSWER: b POINTS: 1 146. Purchased equipment on account ANSWER: i POINTS: 1 147. Issued an invoice to a customer ANSWER: h POINTS: 1 148. Received a check from a customer for payment on account ANSWER: f POINTS: 1 149. Issued check for advertising expense ANSWER: b POINTS: 1 150. Issued check for a payment on account ANSWER: g POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems 151. Issued check for purchase of supplies ANSWER: b POINTS: 1 152. Issued check for salary ANSWER: b POINTS: 1 153. Received cash for a sale ANSWER: a POINTS: 1 154. Purchased supplies on account ANSWER: i POINTS: 1 155. Purchased a computer for cash ANSWER: b POINTS: 1 156. Paid for the equipment purchased on account ANSWER: g POINTS: 1 157. Recorded the adjustment for supplies used during the month ANSWER: e POINTS: 1

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Chapter 5 - Accounting Systems Objective Short Answer 158. Mickey Co. does business in three regional segments: West, East, and Central. The following information is available: Current Year (in thousands)

Segment

Prior Year (in thousands)

East

$ 776,000

$ 664,000

West

824,000

596,000

Central

495,000

325,000

$2,095,000

$1,585,000

Total revenues

Prepare a horizontal analysis of the segment data. Round percentages to two decimal places.

Increase (Decrease)

ANSWER: Current Year Prior Year (in (in Segment thousands) thousands) East $ 776,000 $ 664,000 West 824,000 596,000 Central 495,000 325,000 $2,095,000 $1,585,000 Total revenues

Amount $112,000 228,000 170,000 $510,000

Percent 16.87% 38.26 52.31 32.18

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Objective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 12:13 PM

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Chapter 5 - Accounting Systems 159. Minnie Co. does business in three segments: Theme Parks, Movie Production, and Merchandise. The following information from the current year is available: Current Year (in thousands) $ 776,000 824,000 495,000 $2,095,000

Segment Theme Parks Movie Production Merchandise Total revenues

Prior Year (in thousands) $ 664,000 596,000 325,000 $1,585,000

Prepare a vertical analysis of the segment data. Round percentages to two decimal places.

ANSWER:

Segment Theme Parks Movie Production Merchandise Total revenues

Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 776,000 37.04% $ 664,000 41.89% 824,000 39.33 596,000 37.60 495,000 23.63 325,000 20.50 $2,095,000 100.00% $1,585,000 100.00% (rounded)

POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems Subjective Short Answer 160. Briefly describe the three-step process of accounting system development. (1) ANSWER:

Analysis. The needs of those who will use the business's financial information are identified. Design. The system is designed so that it will meet the users' needs. Implementation. The chosen system is put in place.

(2) (3) POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 161. Define and describe an accounting system. ANSWER:

An accounting system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. Accounting systems for large companies often record more than just basic transaction data (i.e. aircraft maintenance for an airline). These systems evolve through the process of (1) analysis of information needs, (2) system design, and (3) implementation of the design. Input from users is used to analyze and improve the system. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM 162. Utilizing the revenue journal below, journalize the following five transactions of Porshe Creations: (a) On March 20, Porshe sells 25 cell phone covers to Xtreme at $4.50 per cover on Invoice No. 887. (b) On March 21, Porshe sells 5 cell phone covers to Sidekick for $7.50 per cover on Invoice No. 908. Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems (c) (d) (e)

On March 22, Porshe sells 18 cell phone covers to Rock-On at $4.25 per cover on Invoice No. 938. On March 26, Porshe sells 200 cell phone covers to Micro at $3.75 each on Invoice No. 959. On March 29, Porshe sells 6 cell phone covers to Charmers for $8.35 each on Invoice No. 997.

Revenue Journal

Date

Invoice No.

Page 15

Account Debited

Post. Ref.

Accts. Rec. Dr. Sales Rev. Cr.

ANSWER: Revenue Journal Invoice Account Debited No. 887 Mar. 20 Xtreme

Date

POINTS: DIFFICULTY: QUESTION TYPE:

Page 15 Post. Ref.

Accts. Rec. Dr. Fees Earned Cr. 112.50

908

Sidekick

37.50

938

Rock-On

76.50

959

Micro

750.00

997

Charmers

50.10

1 Moderate Bloom's: Applying Subjective Short Answer

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Chapter 5 - Accounting Systems HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 12:23 PM 163. Discuss the process of posting from a revenue journal to the subsidiary ledger and to the general ledger. ANSWER:

Each transaction is posted individually to customer accounts in the accounts receivable subsidiary ledger. This should be done on a regular basis to keep customer balances current. To provide a trail of the entries posted to the subsidiary and general ledgers, the source of the entries is indicated in the Posting Reference column by inserting the letter R for revenue journal and the page number of the revenue journal. A check mark is inserted in the Posting Reference column to indicate that the transaction has been posted to the subsidiary ledger.

At the end of the month, the column total is posted to the general ledger as a debit to Accounts Receivable and a credit to Fees Earned. This total is equal to the sum of the month’s debits to the individual accounts in the subsidiary ledger. POINTS: 1 DIFFICULTY: Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 12:40 PM

Page 78

Chapter 5 - Accounting Systems 164. Two transactions were posted to the following customer account. NAME: Boogie Board Water Wear ADDRESS: 2340 Xtreme Surf Date Item Post. Ref. July 1 Balance 6 Invoice No. 406 R42 24 Invoice No. 456 CR56

Debit

Credit 645 710

Balance 805 1,450 740

Describe each transaction and the source of each posting. July 6 ANSWER: July 24

Sold $645 on account to Boogie Board Water Wear, itemized on Invoice No. 406. Amount posted from page 42 of the revenue journal Cash of $710 was collected from Boogie Board Water Wear, Invoice No. 456. Amount posted from page 56 of the cash receipts journal.

POINTS: DIFFICULTY:

Date

Account Credited

Post. Ref.

Purchases Journal 1 Accounts Other Payable Supplies Accounts Cr. Dr. Dr.

Page

Post. Ref.

Amount Page 79

Chapter 5 - Accounting Systems

ANSWER: Purchases Journal

Date

Account Credited

Aug. 1Gear Inc. 6 Southland Co. 14 Gear Inc.

Page 1

Accounts Other Post. Payable Supplies Accounts Post. Ref. Cr. Dr. Dr. Ref. Amount 5,600 Equipment 5,600 3,250

3,250

2,500

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 1:25 PM

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Chapter 5 - Accounting Systems 166. For each of the following businesses, explain how a purchases journal might be modified for the specific business. 1. North County Medical Center 2. Tri-County Farms, Inc. 3. Prescott’s Quick Lube and Tire Store ANSWER:

The purchases journal for North County Medical Center may include columns for pharmaceutical products (IV solutions, injectable drugs), linens (sheets, blankets, pillows), and disposable medical equipment (needles, syringes). The purchases journal for Tri-County Farms, Inc. may include columns for the various types of seeds (corn, wheat), livestock (cows, hogs, sheep), fertilizer, and fuel.

The purchases journal for Prescott’s Quick Lube and Tire Store may include columns for oil products (motor oil, grease), tires, and maintenance fluids (transmission fluid, antifreeze). POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 1:29 PM

Page 81

Chapter 5 - Accounting Systems 167. For each of the following businesses, explain how a revenue journal might be modified for the specific business. 1. Jon’s Auto Repair Business 2. Esquire Movie Theater 3. Beach Hut Snack Bar, Restaurant, and Lounge ANSWER:

Jon’s Auto Repair Business might modify the revenue journal to include columns for each type of major repair service. In addition, columns for warranty repairs and sales taxes may be added. Esquire Movie Theater might modify the revenue journal to include admissions, concessions, and game room revenues from video games in the lobby.

Beach Hut Snack Bar, Restaurant, and Lounge might modify the revenue journal to include columns for snack bar sales, restaurant sales, and liquor sales in the lounge. In addition, columns for credit card charges and sales taxes may be added. POINTS: 1 DIFFICULTY: Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 1:31 PM

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Chapter 5 - Accounting Systems 168. Explain what subsidiary ledgers are and give examples of three types of subsidiary ledgers that a business might use. ANSWER:

A subsidiary ledger groups a large number of accounts with a common characteristic together. Each subsidiary ledger is summarized in the general ledger by a controlling account. Most commonly, companies use accounts receivable and accounts payable subsidiary ledgers to detail individual customer or vendor accounts. Businesses often use subsidiary ledgers to keep track of equipment purchased, its location, and other equipment data. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

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Chapter 5 - Accounting Systems 169. Two transactions were posted to the following customer account: NAME: Gen-X Products, Inc. Address: 123 My Way Date Item Mar. 1 Balance 10 Invoice No. 987 19 Invoice No. 995

Post. Ref. √ R45 CR78

Debit

Credit 990 825

Balance 1,150 2,140 1,315

Describe each transaction and the source of each posting. ANSWER: Mar. 10

Sold $990 on account to Gen-X Products, Inc., itemized on Invoice No. 987. Amount posted from page 45 of the revenue journal. Collected cash of $825 from Gen-X Products, Inc. (Invoice No. 995). Amount posted from page 78 of the cash receipts journal.

POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 170. Two transactions were posted to the following customer account: NAME: Roswell Communications, Inc. Address: 345 Alien Way Date Item Post. Ref. May 1 Balance √ 14 Invoice No. 522 CR230 25 Invoice No. 545 R115

Debit

Credit 625

3,500

Balance 750 125 3,625

Describe each transaction and the source of each posting. ANSWER: May 14

Collected cash of $625 from Roswell Communications, Inc. (Invoice No. 522). Amount posted from page 230 of the cash receipts journal. Sold $3,500 on account to Roswell Communications, Inc., itemized on Invoice No. 545. Amount posted from page 115 of the revenue journal.

POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 171. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Banner Computer Services, Inc. Address: 890 Novice Lane Date Item Post. Ref. July 1 Balance √ 19 Invoice No. 45 P16 26 Invoice No. 39 CP36

Debit

Credit 1,755

3,500

Balance 5,645 7,400 3,900

Describe each transaction and the source of each posting. ANSWER: July 19

Purchased $1,755 on account from Banner Computer Services, Inc., itemized on Invoice No. 45. Amount posted from page 16 of the purchases journal.

Paid $3,500 to Banner Computer Services, Inc. on account (Invoice No. 39). Amount posted from page 36 of the cash payments journal.

POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems 172. The following cash receipts journal headings have been suggested for Tower Tree-Trimming Service Company. What problems do you see with these headings? Date

Account Credited

Post. Ref.

Fees Earned Accounts Cash Other Accounts Cr. Receivable Cr. Cr. Dr.

ANSWER:

The Cash column should be for debits (not credits). The Other Accounts column should be for credits (not debits). A better order of columns would be to place the Other Accounts Cr. column to the left of the Fees Earned Cr. column. POINTS: 1 DIFFICULTY: Challenging Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 1:43 PM

Page 87

Chapter 5 - Accounting Systems 173. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Xample, Inc. Address: 567 Harrison Blvd. Date Item Nov. 1 Balance 9 Invoice No. 564 18 Invoice No. 574

Post. Ref. √ CP45 P28

Debit

Credit 55 75

Balance 125 70 145

Describe each transaction and the source of each posting. ANSWER: Nov. 9

Paid $55 to Xample Inc. on account (Invoice No. 564). Amount posted from page 45 of the cash payments journal.

Purchased $75 on account from Xample Inc., itemized on Invoice No. 574. Amount posted from page 28 of the purchases journal.

POINTS: DIFFICULTY:

On January 3, a one-year insurance policy was purchased for $2,400. The account number for Prepaid Insurance is 16. On January 5, Davidson, Inc. received a payment on account from Pasher Industries of $625. On January 12, Davidson, Inc. made sales on account of $3,500 and sales for cash of $2,300. The account number for Fees Earned is 41. On January 26, Davidson, Inc. received $1,250 in rent revenue from a tenant who leases a portion of its building. The account number for Rent Revenue is 44. On January 29, Davidson, Inc. received a payment on account from Gooden, Inc. for $2,000. Other

Accounts Page 88

Chapter 5 - Accounting Systems

Date

Account Credited

Post. Accounts Receivable Cr. Ref. Cr.

Account Date Credited Pasher Jan. 5 Industries 12 Fees Earned 26 Rent Revenue 29 Gooden, Inc.

ANSWER:

Cash Dr.

Other Accounts Post. Accounts Receivable Ref. Cr. Cr.

√ 41 44

√

625 2,300 1,250 2,000

Cash Dr. 625 2,300 1,250 2,000

Transaction (a) should be recorded in the cash payments journal and the sales on account in transaction (c) should be recorded in the revenue journal. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 9:34 AM 175. Harris, Inc. incurred the following transactions during the month of February. Record the appropriate ones in the cash payments journal. Include posting references. If a transaction should not be recorded in the cash payments journal, indicate where it should be posted. (a) (b) (c) (d) (e)

On February 3, the company purchased $650 worth of supplies on account. The supplies account number is 15. On February 5, Harris, Inc. made a payment on account to Sanders Industries in the amount of $1,215 (Check No. 2214). On February 14, Harris, Inc. bought a one-year insurance policy for $1,500. The prepaid insurance account number is 14 (Check No. 2215). On February 22, Harris, Inc. paid monthly rent of $2,000. The rent expense account number is 63 (Check No. 2216). On February 26, Harris, Inc. purchased equipment making a down payment of

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Chapter 5 - Accounting Systems $3,000 (Check No. 2217) and agreeing to pay the $4,000 balance in 30 days. The equipment account number is 18.

Date

Ck. No.

Account Debited

Other Post. Accounts Accounts Payable Dr. Ref. Dr.

Date

Ck. No.

Feb. 5

2214

2215

22 26

2216 2217

ANSWER:

Account Debited Sanders Industries Prepaid Insurance Rent Expense Equipment

Cash Cr.

Other Post. Accounts Accounts Ref. Dr. Payable Dr. 1,215 √

Cash Cr. 1,215

1,500

63 18

2,000 3,000

Transaction (a) should be recorded in the purchases journal as should the $4,000 balance due on the equipment in transaction (e).

POINTS: DIFFICULTY:

Page 90

Chapter 5 - Accounting Systems 176. The following purchases journal headings have been suggested for Tower Tree-Trimming Service Company. What problems do you see with these headings?

Date

Account Credited

Post. Ref.

Accounts Payable Dr.

Accounts Receivable Cr.

Cash Cr.

Other Accounts Dr.

ANSWER:

Accounts Receivable and Cash are not needed in the purchases journal, since this journal is for purchases on account by Tower. Accounts Payable should be a credit. There should be a Supplies Dr. column. Also, there should be two columns to the extreme right with the headings "Post. Ref." and "Amount." POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 11:37 AM 177. List the four most common special journals used in accounting and describe the transactions recorded in each journal. ANSWER:

Purchases journal: for purchases made on account Revenue journal: for sales made on account Cash receipts journal: for all cash receipt transactions Cash payments journal: for all cash payment transactions POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 4:02 PM

Page 91

Chapter 5 - Accounting Systems 178. Two transactions were posted to the following creditor’s account: NAME Windsurf, Inc. ADDRESS 343 Coastline Road Date Item Aug. 1 Balance 8 Invoice No. 333 15 Invoice No. 567

Post. Ref.

Debit

CP38 P11

Credit

Balance 1,210

1,210

— 735

735

Describe each transaction and the source of each posting. Aug. 8

Payment of $1,210 to Windsurf, Inc. on account (Invoice No. 333). Amount posted from page 38 of the cash payments journal. ANSWER: Aug. 15 Purchased $735 on account from Windsurf, Inc. itemized on Invoice No. 567. Amount posted from page 11 of the purchases journal. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 4:00 PM

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Chapter 5 - Accounting Systems 179. If a two-column (all-purpose) general journal, a revenue journal, and a cash receipts journal are used, indicate the journal in which each of the following transactions should be recorded: (a) (b) (c) (d) (e) (f) (g)

Investment of additional cash in the business by the owner Rendering of services for cash Rendering of services on account Receipt of cash on account from a customer Sale of office supplies for cash, at cost, to a neighboring business Adjustment to record supplies used at the end of the year Closing of drawing account at the end of the year

(a) cash receipts journal (b) cash receipts journal (c) revenue journal (d) cash receipts journal (e) cash receipts journal (f) general journal (g) general journal POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM ANSWER:

Page 93

Chapter 5 - Accounting Systems 180. If a two-column (all-purpose) general journal, a purchases journal, and a cash payments journal are used, indicate the journal in which each of the following transactions should be recorded: (a) (b) (c) (d) (e) (f) (g) (h)

Payment of rent Purchase of supplies on account Purchase of computer on account Purchase of supplies for cash Advance payment of a one-year fire insurance policy on the office Adjustment to record accrued salaries at the end of the period Adjustment to record depreciation at the end of the month Payment of an account payable

(a) cash payments journal (b) purchases journal (c) purchases journal (d) cash payments journal (e) cash payments journal (f) general journal (g) general journal (h) cash payments journal POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM ANSWER:

181. The posting references in the following purchases journal are indicated by letters. Identify each posting reference [(a) through (i)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required.

Date

July 3 7 14 26 31

Account Credited

Post. Ref.

Morton Company Jackson Co. Fallon Inc. Simpson Bros.

(a) (b) (c) (d)

PURCHASES JOURNAL Page 1 Accounts Office Payable Supplies Cr. Dr. 1,150 4,800 7,000 2,350 15,300

Store Supplies Dr. 1,150

4,800 7,000 11,800

1,150 Page 94

Chapter 5 - Accounting Systems (e)

Other Accounts Dr.

Account

Equipment

ANSWER:

(f)

Post Ref.

(h)

(1) (2) (3)

(g)

Amount

1,950 1,950 (i)

General ledger account: (e), (f), (g), (h) Subsidiary ledger account: (a), (b), (c), (d) No posting required: (i)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/30/2017 4:12 PM 182. The following are selected transactions related to purchases on account and cash payments completed during April of the current year. Apr. 1 Issued Check No. 60 in payment of rent for month, $2,400. 5 Purchased office supplies from Clauson Co., $850. 9 Issued Check No. 61 to Dame Co. for $9,750 for cash purchase of equipment. 10 Purchased store supplies from Ewing Co., $425. 15 Issued Check No. 62 to Clauson Co. in payment of April 5 invoice. 17 Purchased store supplies from Patton Co., $7,500. 20 Issued Check No. 63 to Ewing Co. in payment of April 10 invoice of $425. 25 Purchased equipment from Sloan Co., $7,750. 27 Issued Check No. 64 to Patton Co. for partial payment of the April 17 invoice, $4,000. Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems 30 Purchased office supplies from Winthrop Co., $400. (a) (b) (c)

Date

Record the transactions in the purchases and cash payments journals. Total and rule the purchases and cash payments journals as of April 30. Indicate the method of posting the individual items and the totals of the purchases and cash payments journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or below the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or below the totals.

Ck. No.

Account Debited

CASH PAYMENTS JOURNAL 11 Other Accounts Post. Accounts Payable Ref. Dr. Dr.

PURCHASES JOURNAL 22

Date

Account Credited

Post. Ref.

Accounts Payable Cr.

Office Supplies Dr.

Other Accounts Dr.

Post. Ref.

Amount

Page

Cash Cr.

Page

Store Supplies Dr.

Page 96

Chapter 5 - Accounting Systems

ANSWER: CASH PAYMENTS JOURNAL Other Accounts Check

Account

Post. Accounts

No. 60 61 62 63 64

Debited

Ref. G G √ √ √

Date Apr. 1 9 15 20 27

Rent Expense Equipment Clauson Co. Ewing Co. Patton Co.

Payable

Dr. 2,400 9,750

Dr.

Page 11 Cash

850 425 4,000

Cr. 2,400 9,750 850 425 4,000

12,150

5,275

17,425

(√)

(G)

PURCHASES JOURNAL

Page 22

Accounts

Store

Account

Post.

Payable

Supplies

Date Credited Apr. 5 Clauson Co. 10 Ewing Co. 17 Patton Co. 25 Sloan Co. 30 Winthrop Co. 30

Ref. √ √ √ √ √

Cr.

Dr.

850 425 7,500 7,750 400 16,925 (G)

425 7,500

7,925 (G)

Office

Other

Supplies Dr.

Accounts Dr.

Post. Ref.

Amount

Equipment

7,750

850

400 1,250 Copyright Cengage Learning. Powered by Cognero.

7,750 Page 97

Chapter 5 - Accounting Systems (G)

(√ )

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 2/22/2017 9:36 AM 183. Listed below are selected transactions completed by Ridge Company during March of the current year. Mar. 5 Rendered services on account to Quinton Co., Invoice No. 92, $3,250. 10 Rendered services on account to Martin Inc., Invoice No. 93, $4,500. 13 Received $5,000 in payment of monthly rent, which was due on March 1. 15 Received payment from Quinton Co. for invoice of March 5. 19 Received payment from Martin Inc. for balance due on invoice of March 10. 20 Received amount due from Thomas Co. on sale made in February, $5,200. 31 Recorded cash from services rendered for cash during the month, $15,750. (a) (b) (c)

Date

Record the transactions in the revenue journal and cash receipts journal. Total and rule the revenue and cash receipts journals. Indicate the method of posting the individual items and the columnar totals of the revenue and cash receipts journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or below the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or below the totals. REVENUE JOURNAL Post. Invoice No. Account Debited Ref.

Page 10 Accts. Rec. Dr. Fees Earned Cr.

CASH RECEIPTS JOURNAL

Page 23

Other Copyright Cengage Learning. Powered by Cognero.

Accounts Page 98

Chapter 5 - Accounting Systems

Date

Account Credited

Post. Ref.

Accounts Cr.

Receivable Cr.

Cash Dr.

ANSWER:

Date

Invoice No.

Mar. 5 10 31

92 93

REVENUE JOURNAL Page 10 Post. Accts. Rec. Dr. Account Ref. Fees Earned Cr. Debited Quinton Co. √ 3,250 Martin Inc. √ 4,500 7,750 (G)(G) CASH RECEIPTS JOURNAL

Page 23

Other

Accounts

Receivable

Account

Post.

Credited Mar. 13 Rent Revenue

Ref. G

15 Quinton Co. 19 Martin Inc.

√

3,250

√

4,500

20 Thomas Co. 31 Services Revenue

√

5,200

Date

Cr. 5,000

Cr.

Cash Dr. 5,000

15,750

20,750

12,950

33,700

(√)

(G)

POINTS: DIFFICULTY:

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Chapter 5 - Accounting Systems

DATE CREATED: DATE MODIFIED:

ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 1/16/2017 3:53 PM 2/22/2017 9:39 AM

184. Down-Under, an aquatic supply store, makes the following five payments during August. Journalize them in the cash payments journal as appropriate. (a) On August 2, Down-Under paid Pondmaster, Inc. with Check No. 6420 for 6 pumps at $435.00 each. The pumps had been purchased in July on account. (b) On August 10, Down-Under purchased $785.00 of office supplies from Business Systems with Check No. 6421. (c) On August 15, Down-Under paid Aqua Magic $215.00 on account with Check No. 6422. (d) On August 27, Down-Under paid an invoice for merchandise received earlier from Spindrifter, Inc. for 8 drains at $73.50 each with Check No. 6423. (e) On August 31, Down-Under purchased $65.00 of koi clay from The Natural Wonder Company by writing Check No. 6424. (Record in Pond Supplies Expense.)

Cash Payments Journal

Date

Ck. No.

Account Debited

Page 17 Other Accounts Post. Accounts Payable Cash Ref. Cr. Dr. Dr.

ANSWER:

Cash Payments Journal

POINTS:

Other Accounts Accounts Payable Dr. Dr.

Date

Ck. No.

Aug. 2

6420

Pondmaster, Inc.

6421

Office Supplies

6422

Aqua Magic

215.00

6423

Spindrifter, Inc.

588.00

6424

Pond Supplies Expense

Account Debited

Post. Ref.

Page

2,610.00

Cash 2,610.00

785.00

65.00

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Chapter 5 - Accounting Systems DIFFICULTY:

Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/31/2017 10:34 AM 185. Voyager Electronic Services has three customers in its accounts receivable subsidiary ledger with beginning balances as follows: Fred Yao Ming, $1,150.00 Kohl Townson, $850.00 Chandra Jahi, $1,075.00 Record the following transactions in a general journal. Then post to the accounts receivable account in the general ledger and to the customer accounts in the accounts receivable subsidiary ledger. June 3 10 15 16 23

Kohl Townson paid $325.00 on account. Chandra Jahi purchased $475.00 on account. Fred Yao Ming paid $395.00 on account. Fred Yao Ming purchased $685.00 on account. Kohl Townson purchased $155.00 on account.

Date

General Journal Post. Description Ref.

Page 41 Debit

Credit

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Chapter 5 - Accounting Systems

GENERAL LEDGER Account Accounts Receivable Post. Date Item Ref. Debit Credit June 1 Beg. balance √

Account No. 12 Balance Debit Credit 3,075.00

ACCOUNTS RECEIVABLE SUBSIDARY LEDGER Fred Yao Ming Post. Date Item Ref. Debit Credit Balance 1,150.00 June 1 Beg. balance √

Kohl Townson Date Item June 1 Beg. balance

Post. Ref.

Debit

Credit

Balance 850.00

√

Chandra Jahi Date

Item

June 1 Beg. balance

Post. Ref.

√

Debit

Credit

Balance 1,075.00

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Chapter 5 - Accounting Systems

ANSWER: General Journal Description

Post. Ref.

A/R—Kohl Townson

12/√

Date June 3 Cash

10 A/R—Chandra Jahi

Page 41 Debit Credit 325.00 325.00

12/√

475.00 475.00

Sales 395.00

15 Cash A/R—Fred Yao Ming 16 A/R—Fred Yao Ming

395.00

12/√ 12/√

685.00 685.00

Sales 23 A/R—Kohl Townson

12/√

155.00 155.00

Sales GENERAL LEDGER Account Accounts Receivable Date Item Post. Ref. June 1 Beg. balance √ 3 J41 10 J41 15 J41 16 J41 23 J41

Account No. 12 Balance Debit Credit Debit Credit 3,075.00 325.00 2,750.00 475.00 3,225.00 395.00 2,830.00 685.00 3,515.00 155.00 3,670.00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Fred Yao Ming Post. Date Item Ref. Debit Credit June 1 Beg. balance √ 15 J41 395.00 16 J41 685.00

Balance 1,150.00 755.00 1,440.00

Kohl Townson Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems

Date Item June 1 Beg. balance 3 23

Post. Ref.

Debit

Credit

√ J41 J41

325.00 155.00

Balance 850.00 525.00 680.00

Chandra Jahi Date Item June 1 Beg. balance 10

Post. Ref.

Debit

Credit

√ J41

475.00

Balance 1,075.00 1,550.00

POINTS: DIFFICULTY:

Page 104

Chapter 5 - Accounting Systems 186. Read each transaction and identify the appropriate journal in which it should be recorded. 1. Owner withdrew supplies 2. Sale made on account 3. Payment to vendor on account 4. Payment received from customer on account 5. Purchases on account 6. Adjusting journal entry for supplies used 7. Owner withdrew cash 8. Company borrows money from bank 9. Record monthly depreciation 10. Close revenue accounts at month's end ANSWER:

1. general journal 2. revenue journal 3. cash payments journal 4. cash receipts journal 5. purchases journal 6. general journal 7. cash payments journal 8. cash receipts journal 9. general journal 10. general journal POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/26/2017 1:15 PM

Page 105

Chapter 5 - Accounting Systems 187. Read each transaction and identify the journal in which the transaction should be recorded. 1. Recorded adjusting journal entry for accrued interest 2. Performed advising services on account 3. Purchased office supplies on account 4. Borrowed money for expansion project 5. Received $500 from Tool Tech. on account 6. Owner withdrew cash for personal use 7. Paid monthly rent 8. Recorded depreciation on equipment 9. Completed Job 34aG for services provided to Beard Co. 10. Purchased inventory on account ANSWER:

1. general journal 2. revenue journal 3. purchases journal 4. cash receipts journal 5. cash receipts journal 6. cash payments journal 7. cash payments journal 8. general journal 9. revenue journal 10. purchases journal POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:53 PM DATE MODIFIED: 1/31/2017 12:58 PM

Page 106

Chapter 5 - Accounting Systems 188. The posting references in the following revenue journal are indicated by letters. Identify each posting reference [(a) through (h)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required.

Date Apr. 3 8 13 17 25 30 30

REVENUE JOURNAL Post Invoice No. Account Debited Ref. 190 Hill Company (a) 191 North Supply (b) 192 Macon Inc. (c) 193 White Products (d) 194 Easton Supply (e) 195 Karson Enterprises (f)

(1) (2) (3)

ANSWER:

Page 25 Acct. Rec. Dr. Fees Earned Cr. 4,750 5,025 2,100 6,000 2,250 3,750 23,875 (g) (h)

General ledger account: (g), (h) Subsidiary ledger account: (a), (b), (c), (d), (e), (f) No posting required: none

POINTS: DIFFICULTY:

Date

Account Credited

Cash Receipts Journal Other Beverage Food Post. Accounts Revenue Revenue Ref. Cr. Cr. Cr.

Cash Cr.

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Chapter 5 - Accounting Systems

Mar. 1 Cash received for beverages, $375. 1 Cash received for food, $250. 1 Cash received for customer sales of Sunrise’s signature coffee mugs, $130. 7 Cash received for beverages, $480. 7 Cash received for food, $325. 7 Cash received for customer sales of Sunrise’s signature coffee mugs, $115. 10 Cash received on account from Central.com, $900.

10 Cash 12 Accounts Receivable 15 Retail Items

Chart of Accounts (Partial) 41 Beverage Revenue 42 Food Revenue 43 Retail Revenue

ANSWER: Cash Receipts Journal

Date Account Credited Mar. 1 Cash sales

Post. Ref. √

1 Cash sales 1 Retail Revenue

√ 43

7 Cash sales

√

7 Cash sales 7 Retail Revenue

√ 43

10 A/R—Central.com

12/√

Beverage Food Other Revenue Revenue Cash Cr. Cr. Cr. Dr. 375 375 250 130

130 480

480 325 115 900 1,145 (10)

250

325 115 900

855 (41)

575 (42)

2,575 √

Yes. Retail Revenue Cr. and possibly Accounts Receivable Cr. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:54 PM 1/31/2017 1:06 PM

190. Explain whether each of the following would usually be used in a computerized accounting system and why or why not. 1. Special journals 2. Accounts receivable control accounts 3. Electronic invoice form 4. Month-end postings to the general ledger ANSWER:

Special journals and accounts receivable control accounts are generally not used in computerized systems. Instead, electronic forms like electronic invoice forms are used to record original transactions. Since the computer automatically posts transactions from electronic forms to the general ledger and individual accounts at the time the transactions are recorded, month-end postings are not necessary in a computerized system. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 1:10 PM

Page 109

Chapter 5 - Accounting Systems 191. The discovery and correction of errors is important in a computerized system. What kinds of errors might occur in these systems? What type(s) of errors will be prevented in a computerized system? ANSWER:

Potential errors: 1. Failing to record transactions. 2. Recording a transaction more than once. 3. Recording a transaction in incorrect accounts. 4. Entering an incorrect number in both the debit and credit parts of the transaction.

With a computerized system, you cannot process a transaction unless debits equal credits. Additionally, you cannot post to the wrong account, as posting occurs automatically. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/22/2017 9:41 AM

Page 110

Chapter 5 - Accounting Systems 192. Identify the three main advantages of a computerized accounting system over a manual accounting system. ANSWER:

1. Simplification of the recording process by recording transactions electronically and posting to both the general and subsidiary ledgers at the same time. 2. Generally more accurate than manual systems.

3. Provides management with current balance information to support decision making since account balances are updated as transactions are entered. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 STATE STANDARDS: United States - AK - AICPA BB Leveraging ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/26/2017 1:15 PM 193. Define the meaning of the terms B2C and B2B as they relate to e-commerce. ANSWER:

B2C: Business to consumer e-commerce: businesses sell directly to consumers via the Internet.

B2B: Business to business e-commerce: transactions are conducted between two businesses via the Internet. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 1:24 PM

Page 111

Chapter 5 - Accounting Systems 194. Describe and discuss e-commerce. ANSWER:

E-commerce is the term for using the Internet to perform business transactions. B2C e-commerce involves transactions between businesses and consumers. B2B e-commerce involves transactions between two businesses.

Currently e-commerce sales are over $340 billion in retail sales, or over 7% of all retail sales. B2C allows consumers to shop and receive goods at home and improves the speed and efficiency of transactions. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 1:35 PM 195. The Internet creates opportunities for improving the speed and efficiency of transactions. Name and describe three key areas besides e-commerce where the Internet is being used for business purposes. ANSWER:

1. Supply chain management (SCM): Internet applications to plan supply needs and coordinate them with suppliers. 2. Customer relationship management (CRM): Internet applications to plan and coordinate marketing and sales efforts. 3. Product life-cycle management (PLM): Internet applications to plan and coordinate the product development and design process. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 1:37 PM

Page 112

Chapter 5 - Accounting Systems 196. Payton Company has the following segment revenues for the two most recent years. Segment United States Canada Other countries Total revenues

Current Year (in millions) $ 825.00 325.50 215.50 $1,366.00

Prior Year (in millions) $ 600.00 345.50 168.50 $1,114.00

Prepare a horizontal analysis of the segment data. Round to one decimal place. Increase (Decrease)

ANSWER: Current Year Prior Year (in millions) (in millions) United States $ 825.00 $ 600.00 Canada 325.50 345.50 Other countries 215.50 168.50 $1,114.00 Total revenues $1,366.00 Segment

Amount $225.00 (20.0) 47.00 $252.00

Percent 37.5% (5.8) 27.9 22.6

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 1:42 PM

Page 113

Chapter 5 - Accounting Systems 197. Payton Company has the following segment revenues for the two most recent fiscal years. Segment China Canada Other countries Total revenues

Current Year (in millions) $ 775.00 325.50 215.50 $1,316.00

Prior Year (in millions) $ 650.00 245.50 168.50 $1,064.00

Prepare a vertical analysis of the segment data. Round to one decimal place.

ANSWER:

Current Year Amount Segment (in millions) Percent China. $ 775.00 58.9% Canada 325.50 24.7 Other countries 215.50 16.4 Total revenues $1,316.00 100.0%

Prior Year Amount (in millions) Percent $ 650.00 61.1% 245.50 23.1 168.50 15.8 $1,064.00 100.0%

POINTS: DIFFICULTY:

Page 114

Chapter 5 - Accounting Systems 198. Maximilian Corporation provided revenue disclosures for the current year by its major product segments in the notes to its financial statements as follows: Current Year (in millions) $10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340

Major Product Segments Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues

Prepare a vertical analysis. Round to one decimal place. ANSWER: Major Product Segments

Current Year (in millions) $10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340

Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues *Difference in percentages due to rounding. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/31/2017 4:42 PM

Percent 18.5% 16.8 15.2 13.0 12.2 10.4 8.1 5.7 100.0%*

199. Eastwood Publishing reports the following segment data regarding its textbook sales: Segment College textbooks Copyright Cengage Learning. Powered by Cognero.

Current Year $ 78,000

Prior Year $ 55,000 Page 115

Chapter 5 - Accounting Systems High school textbooks Elementary school textbooks Total revenues

129,000 105,000 $312,000

115,000 121,000 $291,000

Perform a horizontal analysis and a vertical analysis for Eastwood Publishing. Round to one decimal place. ANSWER:

Horizontal Analysis: Increase (Decrease) Segment

Current Year

Prior Year

Amount

Percent

College textbooks

$ 78,000

$ 55,000

$ 23,000

41.8%

High school textbooks

129,000

115,000

14,000

12.2

Elementary school textbooks

105,000

121,000

(16,000)

(13.2)

$312,000

$291,000

$ 21,000

7.2

Total revenues

Vertical Analysis:

Current Year Segment

Amount

Prior Year

Percent

Amount

Percent

College textbooks

$ 78,000

25.0%

$ 55,000

18.9%

High school textbooks

129,000

41.3

115,000

39.5

Elementary school textbooks

105,000

33.7

121,000

41.6

$312,000

100.0%

$291,000

100.0%

Total revenues

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Copyright Cengage Learning. Powered by Cognero.

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Chapter 5 - Accounting Systems DATE CREATED: DATE MODIFIED:

1/16/2017 3:54 PM 2/22/2017 11:23 AM

200. What is a business segment? How can business segments be analyzed? ANSWER:

A business segment is a subset of a business. Businesses may be segmented by region, product or service, or type of customer. Segment analysis uses horizontal and vertical comparisons to analyze the segments’ contributions to the overall performance of the company. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 1/26/2017 1:15 PM

Page 117

Chapter 5 - Accounting Systems 201. 123 Kids TV operates in five major international segments. Current Year (in millions) $ 9,132 8,248 4,734 11,700 5,645 $39,459

Segment United States Canada England China Brazil Total revenues

Prior Year (in millions) $ 8,528 6,391 4,141 13,299 6,391 $38,750

Prepare a horizontal analysis of the segment data. Round percentages to two decimal places.

Increase (Decrease)

ANSWER: Segment United States Canada England China Brazil Total revenues

Current Year Prior Year (in millions) (in millions) Amount $ 9,132 $ 8,528 $ 604 8,248 6,391 1,857 4,734 4,141 593 11,700 13,299 (1,599) 5,645 6,391 (746) $39,459 $38,750 $ 709

Percent 7.08% 29.06 14.32 (12.02) (11.67) 1.83

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/22/2017 11:24 AM

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Chapter 5 - Accounting Systems 202. Connie and Jill operate Reardon's Bakery which has the following segment revenues for the most recent two fiscal years. Prepare a vertical analysis. Round percentages to two decimal places. Current Year (in thousands) $ 691,000 512,000 417,000 875,000 $2,495,000

Segment Cakes Cupcakes Desserts Beverages Total revenues

ANSWER: Segment Cakes Cupcakes Desserts Beverages Total revenues

Prior Year (in thousands) $ 662,000 550,000 468,000 815,000 $2,495,000

Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 691,000 27.70% $ 662,000 26.53% 512,000 20.52 550,000 22.04 417,000 16.71 468,000 18.76 875,000 35.07 815,000 32.67 $2,495,000 100.00% $2,495,000 100.00%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/22/2017 11:25 AM

Page 119

Chapter 6 - Accounting for Merchandising Businesses True / False 1. The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 2. In a merchandise business, sales minus operating expenses equals net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 1

Chapter 6 - Accounting for Merchandising Businesses 3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 4. Service businesses provide services for income, while a merchandising business sells merchandise. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 6 - Accounting for Merchandising Businesses 5. In retail businesses, inventory is reported as a current asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 6. Under a perpetual inventory system, the cost of merchandise on hand at the end of the year can only be determined by reviewing the ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 6 - Accounting for Merchandising Businesses 7. In a perpetual inventory system, the merchandise inventory account is only used to reflect the beginning inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 8. Freight is the amount paid by the seller to deliver merchandise sold to a customer under FOB shipping point. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 6 - Accounting for Merchandising Businesses 9. Freight is considered a cost of inventory under FOB shipping point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 10. The cost of merchandise inventory is limited to the purchase price less any purchase discounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 6 - Accounting for Merchandising Businesses 11. Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 12. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 6 - Accounting for Merchandising Businesses 13. When merchandise that was sold is returned, a credit to sales returns and allowances is made. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 14. In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 6 - Accounting for Merchandising Businesses 15. Customer Refunds Payable is an account used to record merchandise returns from customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 16. Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 8

Chapter 6 - Accounting for Merchandising Businesses 17. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 18. Large businesses that make sales to customers who use credit cards, such as American Express, generally treat these sales as credit sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 19. Most retailers record all credit card sales as credit sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 20. The fees associated with credit card sales are periodically recorded as expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 21. A seller may grant a buyer a reduction in selling price and this is called a customer discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 22. A sales discount encourages customers to pay accounts more quickly than if a discount were not available. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 23. Merchandise Inventory normally has a debit balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 24. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 25. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 26. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 27. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 28. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 29. Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 30. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 31. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called a cash discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 33. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the carrier, the terms are stated as FOB destination. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 34. A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750. a. True b. False ANSWER: RATIONALE:

False Accounts Receivable = Sales + Sales Tax Payable = $750 + ($750 × 6%) = $750 + $45 = $795 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 35. When merchandise is sold for $600 plus a 6% sales tax, the sales account should be credited for $636. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False The sales account is credited for the amount of the sale, which is $600. 1 Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 36. The abbreviation FOB stands for "free on board." a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 37. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount of the sales recorded is $3,528. a. True b. False ANSWER: RATIONALE:

True Amount of Sales Recorded = Sales – Sales Discount = $3,600 – (2% × $3,600) = $3,600 – $72 = $3,528 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 38. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 39. When the terms of sale are FOB shipping point, the buyer should pay the freight charges. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 40. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70. a. True b. False ANSWER: RATIONALE:

True Credit terms of 2/10, n/30, provides a 2% discount if the invoice is paid within 10 days. If not paid within 10 days, the total invoice amount is due within 30 days. Amount of Purchase Discount = 2% × Cost of Merchandise = 2% × $3,500 = $70 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 41. The chart of accounts for a merchandising business would include an account called Delivery Expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 42. There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 43. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 44. Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 45. The seller may prepay the freight costs even though the terms are FOB shipping point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 46. The seller records the sales tax as part of the sales amount. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 47. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 48. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 49. Because many companies use computerized accounting systems, periodic inventory is widely used. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 50. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 51. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 52. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 53. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 54. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 55. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 56. Sales is equal to the cost of merchandise sold less the gross profit. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 57. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 58. In a multiple-step income statement, the dollar amount for income from operations is always the same as net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 59. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 60. Gross profit minus selling expenses equals net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 61. The account form of the balance sheet is presented in a downward sequence in three sections. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 62. In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 63. As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 64. Cost of merchandise sold is often the largest expense on a merchandising company income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 65. When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of owner's equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 66. Other income and expenses are items that are not related to the primary operating activity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 67. Closing entries for a merchandising business are not similar to those for a service business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 68. The ratio of sales to assets measures how effectively a business is using its assets to generate sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 69. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 70. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 71. In the periodic inventory system, purchases of merchandise for resale are debited to the purchases account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 72. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 73. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Multiple Choice 74. Merchandise inventory is classified on the balance sheet as a a. current liability b. current asset c. long-term asset d. long-term liability ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 75. Which of the following is not a difference between a retail business and a service business? a. in what is sold b. the inclusion of gross profit on the income statement c. accounting equation d. merchandise inventory included on the balance sheet ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 76. In a merchandising business, operating income plus operating expenses is equal to a. cost of merchandise sold b. cost of merchandise available for sale c. sales d. gross profit ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 77. What is the term applied to the excess of revenue from sales over the cost of merchandise sold? a. gross profit b. income from operations c. net income d. gross sales ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 78. Calculate income from operations for Jonas Company based on the following data: Sales Operating expenses Cost of merchandise sold a. $485,500 b. $711,500 c. $173,500 d. $226,000

$764,000 52,500 538,000

ANSWER: RATIONALE:

c Income from Operations = Sales – Cost of Merchandise Sold – Operating Expenses = $764,000 – $538,000 – $52,500 = $173,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 79. Gross profit is equal to a. sales plus cost of merchandise sold b. sales plus selling expenses c. sales less selling expenses d. sales less cost of merchandise sold ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 80. When comparing a retail business to a service business, the financial statement that changes the most is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 81. Calculate the gross profit for Jefferson Company based on the following: Sales Selling expenses Cost of merchandise sold a. $495,500 b. $183,500 c. $721,500 d. $226,000

$764,000 42,500 538,000

ANSWER: RATIONALE:

d Gross Profit = Sales – Cost of Merchandise Sold = $764,000 – $538,000 = $226,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 82. The inventory system employing accounting records that continuously disclose the amount of inventory is called a. retail b. periodic c. physical d. perpetual ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 83. Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms 2/15, net 45. Pound Co. paid the invoice within the discount period. What is the amount of sales from the above transactions? a. $25,500 b. $26,010 c. $24,990 d. $16,000 ANSWER: RATIONALE:

c Amount of Sales = Invoice Amount – Sales Discount = $25,500 – (2% × $25,500) = $25,500 – $510 = $24,990 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 84. The primary difference between a periodic and perpetual inventory system is that a a. periodic system determines the inventory on hand only at the end of the accounting period b. periodic system keeps a record showing the inventory on hand at all times c. periodic system provides an easy means to determine inventory shrinkage d. periodic system records the cost of the sale on the date the sale is made ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 85. Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Accounts Receivable ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 86. Which of the following accounts has a normal debit balance? a. Accounts Payable b. Merchandise Inventory c. Sales d. Interest Revenue ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 87. Merchandise is ordered on November 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 13; the merchandise is received by the buyer on November 18; the entry is made in the buyer's accounts on November 20. The credit period begins with what date? a. November 10 b. November 13 c. November 18 d. November 20 ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 88. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a a. credit to Customer Refunds Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. debit to Cash ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 89. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a a. sales invoice b. purchase invoice c. credit memo d. debit memo ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 90. The arrangements between buyer and seller as to when payments for merchandise are to be made are called a. credit terms b. net cash c. cash on demand d. gross cash ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 91. In credit terms of 3/15, n/45, the "3" represents the a. number of days in the discount period b. full amount of the invoice c. number of days when the entire amount is due d. percent of the cash discount ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 92. Merchandise with a sales price of $5,000 is sold on account with terms 2/10, n/30. The journal entry to record the sale would include a a. debit to Cash for $5,000 b. debit to Sales Discounts for $100 c. credit to Sales for $4,900 d. debit to Accounts Receivable for $4,880 ANSWER: RATIONALE:

c Amount of Sales = Invoice Amount – Sales Discount = $5,000 – (2% × $5,000) = $5,000 – $100 = $4,900. The journal entry to record the sale would include a credit to Sales for $4,900. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic TOPICS: Bloom's: Applying DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 93. Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $25,000. What is the amount of the sales discount allowable? a. $260 b. $500 c. $460 d. $150 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Sales Discount Allowable = 2% × Sales = 2% × $25,000 = $500 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 94. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Sales c. Merchandise Inventory d. Delivery Expense ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 95. The entry to record the return of merchandise from a customer would include a a. debit to Sales b. credit to Sales c. debit to Customer Refunds Payable d. debit to Estimated Returns Inventory ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 96. Sales to customers who use bank credit cards such as MasterCard and VISA are usually recorded by a a. debit to Bank Credit Card Sales, a debit to Credit Card Expense, and a credit to Sales b. debit to Cash and a credit to Sales c. debit to Cash, a credit to Credit Card Expense, and a credit to Sales d. debit to Sales, a debit to Credit Card Expense, and a credit to Cash ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 97. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as a. sales on account b. sales returns c. cash sales d. sales when the credit card company remits the cash ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 98. When a buyer returns merchandise purchased for cash, the buyer will record the transaction as a a. debit to Merchandise Inventory and a credit to Cash b. debit to Cash and a credit to Merchandise Inventory c. debit to Cash and a credit to Sales d. debit to Sales and a credit to Accounts Payable ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 99. When merchandise purchased on account is returned under the perpetual inventory system, the buyer would debit a. Merchandise Inventory b. Purchases Returns and Allowances c. Accounts Payable d. Accounts Receivable ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 100. When purchases of merchandise are made on account with a perpetual inventory system, the transaction is recorded with which entry? a. debit Accounts Payable; credit Merchandise Inventory b. debit Merchandise Inventory; credit Accounts Payable c. debit Merchandise Inventory; credit Cash Discounts d. debit Merchandise Inventory; credit Purchases ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 101. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a a. debit to Accounts Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Sales ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 102. Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a a. debit to Cost of Merchandise Sold b. credit to Accounts Payable c. credit to Merchandise Inventory d. credit to Sales ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 103. In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is a a. debit to Cost of Merchandise Sold and a credit to Sales b. debit to Cost of Merchandise Sold and a credit to Merchandise Inventory c. debit to Merchandise Inventory and a credit to Cost of Merchandise Sold d. debit to Accounts Receivable and a credit to Merchandise Inventory ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 104. The amount of the total cash paid to the seller for merchandise purchased for consumption would normally include a. only the list price b. only the sales tax c. the list price plus the sales tax d. the list price less the sales tax ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 105. Norfolk Sporting Goods purchases merchandise with a catalog list price of $30,000. The retailer receives a 30% trade discount and credit terms of 2/10, n/30. What amount should Norfolk debit to the merchandise inventory account? a. $21,000 b. $20,580 c. $30,000 d. $29,400 ANSWER: RATIONALE:

b Price after Trade Discount = $30,000 – ($30,000 × 30%) = $30,000 – $9,000 = $21,000; Debit to Merchandise Inventory Account = Price after Trade Discount – Discount as per Credit Term = [$21,000 – (2% × $21,000)] = $21,000 – $420 = $20,580 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 106. A sales invoice included the following information: merchandise price, $12,000; terms 1/10, n/eom, FOB shipping point with prepaid freight of $900 added to the invoice. Assuming that a credit for merchandise returned of $500 is granted prior to payment and the invoice is paid within the discount period, what is the amount of cash that should be received by the seller? a. $12,285 b. $11,500 c. $10,480 d. $11,385 ANSWER: RATIONALE:

a Cash Received = Sales – Sales Discount + Prepaid Freight – Cost of Merchandise Returned = $12,000 – (1% × $12,000) + $900 – [$500 – (1% × $500)] = $12,000 – $120 + $900 – ($500 – $5) = $12,780 – $495 = $12,285 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 107. Which of the following accounts usually has a debit balance? a. Accounts Payable b. Sales Tax Payable c. Sales d. Merchandise Inventory ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 108. Merchandise is sold for cash. The selling price of the merchandise is $6,000 and the sale is subject to a 7% state sales tax. The journal entry to record the sale would include a credit to a. Cash for $6,000 b. Sales for $6,240 c. Sales Tax Payable for $420 d. Sales for $5,580 ANSWER: RATIONALE:

c Sales Tax Payable = Selling Price × 7% State Sales Tax = $6,000 × 7% = $420. The journal entry to record the sale would include a credit to Sales Tax Payable for $420. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 109. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 110. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 111. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 112. When goods are shipped FOB destination and the seller pays the freight charges, the buyer a. journalizes a reduction for the cost of the merchandise b. journalizes a reimbursement to the seller c. does not take a discount d. makes no journal entry for the freight ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 113. Pierce Company sold merchandise to Stanton Company on account FOB shipping point, 2/10, net 30, for $20,000. Pierce prepaid the $500 shipping charge. Which of the following entries does Pierce make to record this sale? a. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000 b. Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500 c. Accounts Receivable—Stanton, debit $20,100; Sales, credit $20,100 d. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000, and Delivery Expense, debit $500; Cash, credit $500 ANSWER: RATIONALE:

b Amount of Sales = Invoice Amount – Sales Discount = $20,000 – (2% × $20,000) = $20,000 – $400 = $19,600. Journal entry: Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 114. Emma Co. sold to Isabella Co. merchandise on account FOB shipping point, 2/10, net 30, for $15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make to record the payment for the merchandise if Isabella Co. pays within the discount period? a. Accounts Payable—Emma Co., debit $15,000; Cash, credit $15,000 b. Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450 c. Accounts Payable—Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750 d. Accounts Payable—Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050 ANSWER: RATIONALE:

b Accounts Payable = Cost of Merchandise – Purchase Discount + Shipping Charges = $15,000 – (2% × $15,000) + $750 = $15,000 – $300 + $750 = $15,450. Journal entry: Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 115. A chart of accounts for a merchandising business a. usually is the same as the chart of accounts for a service business b. usually requires more accounts than does the chart of accounts for a service business c. usually is standardized by the FASB for all merchandising businesses d. always uses a three-digit numbering system ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 116. Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would be recorded? a. debit Cash, $2,000; credit Merchandise Inventory, $1,250 b. debit Cash, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 c. debit Cash, $1,250; credit Sales, $1,250 d. debit Accounts Receivable, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 117. Jacob Co. sells merchandise on credit to Isaiah Co. for $9,700. The invoice is dated on May 1 with terms of 1/15, net 45. What is the amount of the discount and up to what date must the invoice be paid in order for the buyer to take advantage of the discount? a. $194, May 15 b. $194, May 16 c. $97, May 15 d. $97, May 16 ANSWER: RATIONALE:

d Amount of Discount = Sales Price × 1% = $9,700 × 1% = $97; Last Day of Discount Period = Invoice Date of May 1 plus 15 days = May 16 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 118. Kaden Co. sells merchandise on credit to Jase Co. for $9,600. The invoice is dated July 15 with terms of 1/15, net 45. If Jase Co. chooses not to take the discount, by when should the payment be made? a. July 30 b. August 29 c. August 15 d. July 25 ANSWER: RATIONALE:

b Credit terms of 1/15, n/45, provides a 1% sales discount if the invoice is paid within 15 days. If not paid within 15 days, the total invoice amount is due within 45 days. Credit period of 45 days = 16 days of July (31 – 15) + 29 days of August (45 – 16). Final due date is August 29. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 119. To encourage a buyer to pay before the end of the credit period, the seller may offer a a. purchases discount b. sales discount c. trade discount d. payment discount ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 120. Taking advantage of a 2/10, n/30 purchases discount is equal to a yearly savings rate of approximately a. 2% b. 24% c. 20% d. 36% ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Yearly Savings Rate = 2% × [360 days/(30 days – 10 days)] = 2% × 18 = 36% 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 121. Who is responsible for the freight costs when the terms are FOB shipping point? a. the ultimate customer b. the buyer c. the seller d. either the seller or the buyer ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 122. Who is responsible for the freight cost when the terms are FOB destination? a. the seller b. the buyer c. the customer d. either the buyer or the seller ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 123. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount period? a. $30,000 b. $24,900 c. $29,400 d. $24,990 ANSWER: RATIONALE:

d Price after Trade Discount = Catalog Price – Trade Discount = $30,000 – (15% × $30,000) = $30,000 – $4,500 = $25,500; Cash Required to Pay Invoice = Price after Trade Discount – Purchase Discount = $25,500 – (2% × $25,500) = $25,500 – $510 = $24,990 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 124. What type of company would normally offer trade discounts to its customers? a. service company b. retailer c. wholesaler d. online retailer ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 125. Which of the following accounts will only be found in the chart of accounts of a merchandising company? a. Sales b. Accounts Receivable c. Merchandise Inventory d. Accounts Payable ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 126. Which of the following items would not affect the cost of merchandise inventory acquired during the period? a. quantity discounts b. sales discounts c. freight in d. sales commissions ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:28 AM 127. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are a. consigned b. n/30 c. FOB shipping point d. FOB destination ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 128. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 129. If merchandise sells for $3,500, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales is a. $3,395 b. $3,500 c. $2,037 d. $2,100 ANSWER: RATIONALE:

a Amount Charged to Sales = Sales Price – Sales Discount = $3,500 – (3% × $3,500) = $3,500 – $105 = $3,395 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 130. Under the perpetual inventory system, all purchases of merchandise are debited to the account a. Merchandise Inventory b. Cost of Merchandise Sold c. Cost of Merchandise Available for Sale d. Purchases ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 131. When the perpetual inventory system is used, the inventory sold is debited to a. Supplies Expense b. Cost of Merchandise Sold c. Merchandise Inventory d. Sales ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 132. Under a perpetual inventory system, a. accounting records continuously disclose the amount of inventory b. increases in inventory resulting from purchases are debited to Purchases c. a physical count is required to determine cost of merchandise on hand d. the purchases returns and allowances account is credited when goods are returned to vendors ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 133. The journal entry to record the receipt of inventory purchased for cash in a perpetual inventory system would be a. Jan. 1 Merchandise Inventory 1,500 Cash 1,500 b. Jan. 1 Office Supplies 1,500 Cash 1,500 c. Jan. 1 Purchases 1,500 Accounts Payable 1,500 d. Jan. 1 Cash 1,500 Accounts Receivable 1,500 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 134. Which of the following items should not be included in the cost of ending merchandise inventory? a. purchased units in transit, shipped FOB shipping point b. purchased units in transit, shipped FOB destination c. units on hand in the warehouse d. sold units in transit, not invoiced, and shipped FOB destination ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 135. Corbit Corp. sold merchandise for $10,000 cash. The cost of merchandise sold was $7,590. The journal entries to record this transaction under the perpetual inventory system would be a. Cash 10,000 Merchandise Inventory 10,000 Cost of Merchandise Sold Sales b. Cash Sales Cost of Merchandise Sold Merchandise Inventory c. Cash Sales

7,590 7,590 10,000 10,000 7,590 7,590 10,000 10,000

Cost of Merchandise Sold Merchandise Inventory d. Cash Sales

10,000

Cost of Merchandise Sold Merchandise Inventory

7,590

10,000 7,590 7,590

7,590

ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 136. Merchandise is purchased for $6,000 on September 2 subject to terms of 2/10, n/30, FOB destination. Freight costs paid by the seller totaled $200. What is the cost of the merchandise if paid on September 12, assuming the discount is taken? a. $6,120 b. $5,940 c. $6,090 d. $5,880 ANSWER: RATIONALE:

d Cost of Merchandise = Invoice Amount – Purchase Discount = $6,000 – (2% × $6,000) = $6,000 – $120 = $5,880 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 137. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold was $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions? a. $10,500 b. $30,772 c. $7,972 d. $31,400 ANSWER: RATIONALE:

c Gross Profit Earned by Abbey Co. = Sales after Discount – Selling Price of Returned Merchandise after Discount – (Cost of Merchandise Sold – Cost of Merchandise Returned) = [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – ($24,500 – $1,700) = $7,972 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 138. What is the major difference between a periodic and a perpetual inventory system? a. Under the periodic inventory system, the purchase of inventory will be debited to the purchases account. b. Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory for the cost of the inventory. c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the month. d. All of these choices are correct. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 139. If the physical count of inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to record inventory shrinkage? a. debit Merchandise Inventory, $158,000; credit Cost of Merchandise Sold, $158,000 b. debit Merchandise Inventory, $5,000; credit Cost of Merchandise Sold, $5,000 c. debit Cost of Merchandise Sold, $163,000; credit Merchandise Inventory, $158,000 d. debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000 ANSWER: RATIONALE:

d Inventory Shrinkage = Account Balance of Merchandise Inventory – Physical Merchandise Inventory on Hand = $163,000 – $158,000 = $5,000 Adjusting entry to record inventory shrinkage: debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 140. Inventory shrinkage is recorded when a. merchandise is returned by a buyer b. merchandise purchased from a seller is incomplete or short c. merchandise is returned to a seller d. there is a difference between a physical count of inventory and inventory records ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 141. When comparing a retail business to a service business, the financial statement that changes the least is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 142. Generally, the revenue account for a merchandising business is entitled a. Sales b. Fees Earned c. Gross Sales d. Gross Profit ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 143. Which account is not classified as a selling expense? a. Sales Salaries b. Delivery Expense c. Cost of Goods Sold d. Advertising Expense ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 144. President's salaries, depreciation of office furniture, and office supplies are a. selling expenses b. miscellaneous expenses c. administrative expenses d. inventory expenses ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 145. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as a. selling expenses b. general expenses c. other expenses d. administrative expenses ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 146. When the perpetual inventory system is used, the inventory sold is shown on the income statement as a. cost of merchandise sold b. purchases c. purchases returns and allowances d. net purchases ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 147. The statement of owner's equity shows a. only net income and beginning and ending capital b. only total assets and beginning and ending capital c. only net income, beginning capital, and withdrawals d. beginning and ending capital, all the changes in the owner's capital as a result of net income (loss), and withdrawals ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 148. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the a. account form b. comparative form c. horizontal form d. report form ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 149. Multiple-step income statements show a. gross profit but not income from operations b. neither gross profit nor income from operations c. both gross profit and income from operations d. income from operations but not gross profit ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 150. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step statement b. revenue statement c. report-form statement d. single-step statement ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 151. Which of the following accounts should be closed at the end of the fiscal year? a. Merchandise Inventory b. Accumulated Depreciation c. Drawing d. Cost of Merchandise Sold ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:31 AM 152. Which account will be included in closing entries of both service and merchandising companies? a. Sales b. Cost of Merchandise Sold c. Customer Refunds Payable d. Estimated Inventory Returns ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 153. Bradford Company had sales of $700,000 for the year. The total assets at the beginning of the year were $240,000, and the total assets at the end of the year were $280,000. The ratio of sales to total assets is (round answer to two decimal places) a. 2.69 b. 0.40 c. 2.92 d. 0.34 ANSWER: RATIONALE:

a Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2 = ($240,000 + $280,000)/2 = $260,000 Ratio of Sales to Total Assets = Sales/Average Total Assets = $700,000/$260,000 = 2.69 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 154. Bountiful Company had sales of $650,000 and cost of merchandise sold of $200,000 during the year. The total assets balance at the beginning of the year was $175,000 and at the end of the year was $167,000. Calculate the ratio of sales to total assets. a. 3.00 b. 3.80 c. 0.29 d. 0.26 ANSWER: RATIONALE:

b Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2 = ($175,000 + $167,000)/2 = $171,000 Ratio of Sales to Total Assets = Sales/Average Total Assets = $650,000/$171,000 = 3.80 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 155. Under the periodic inventory system, the journal entry to record the purchase of merchandise inventory will include a debit to a. Merchandise Inventory b. Purchases c. Accounts Payable d. Cost of Merchandise Purchased ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 156. Using the following information, what is the amount of net income? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

$ 960 6,370 63,000 1,040

a. $29,800 b. $29,960 c. $28,760 d. $31,670 ANSWER: RATIONALE:

b Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Income from Operations = Sales – Cost of Merchandise Sold – Administrative Expenses – Selling Expenses = $63,000 – $31,330 – $910 – $960 = $29,800; Net Income = Income from Operations + Rent Revenue – Interest Expense = $29,800 + $1,200 – $1,040 = $29,960 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 157. Using the following information, what is the amount of gross profit? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

$ 960 6,370 63,000 1,040

a. $25,300 b. $31,670 c. $30,600 d. $62,840 ANSWER: RATIONALE:

b Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Gross Profit = Sales – Cost of Merchandise Sold = $63,000 – $31,330 = $31,670 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 158. Using the following information, what is the amount of income from operations? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

$ 960 6,370 63,000 1,040

a. $32,870 b. $31,910 c. $30,710 d. $29,800 ANSWER: RATIONALE:

d Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Income from Operations = Sales – Cost of Merchandise Sold – Administrative Expenses – Selling Expenses = $63,000 – $31,330 – $910 – $960 = $29,800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 159. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to a. $12,670 b. $9,070 c. $8,420 d. $17,230 ANSWER: RATIONALE:

b Cost of Merchandise Purchased = Purchases + Freight In – Purchases Returns and Allowances – Purchases Discounts = $10,700 + $650 – $1,950 – $330 = $9,070 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 160. Which of the following accounts will not be found in the cost of merchandise sold section of the income statement for a company using the periodic inventory method? a. Purchases b. Freight In c. Selling Expense d. Merchandise Inventory ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 161. A company using the periodic inventory system has merchandise inventory costing $210 on hand at the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end, merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is a. $795 b. $685 c. $265 d. $635 ANSWER: RATIONALE:

b Cost of Merchandise Sold = Beginning Inventory + Inventory Purchased – Ending Inventory = $210 + $635 – $160 = $685 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 162. Where are selling and administrative expenses found on the multiple-step income statement? a. before gross profit b. after sales and before gross profit c. after net income and before expenses d. after gross profit ANSWER: POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 163. Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point of sale will include which of the following? a. None of these choices b. Cost of Merchandise Sold c. Inventory d. Purchases ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 164. Under a periodic inventory system, closing entries will include a. debits to Sales, Purchases Returns and Allowances, and Purchases Discounts b. credits to Purchases and Sales Discounts c. adjustments to Merchandise Inventory to match physical inventory d. All of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 165. The proper journal entry to record the receipt of inventory purchased on account in a periodic inventory system would be a. Jan. 1 Merchandise Inventory 1,600 Accounts Payable 1,600 b. Jan. 1 Office Supplies 1,600 Accounts Payable 1,600 c. Jan. 1 Purchases 1,600 Accounts Payable 1,600 d. Jan. 1 Purchases 1,600 Accounts Receivable 1,600 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 166. Using the following information, what is the cost of merchandise sold? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $32,400 b. $32,670 c. $31,330 d. $38,370

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

$ 960 6,370 63,000 1,040

ANSWER: RATIONALE:

c Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330 POINTS: 1 DIFFICULTY: Bloom's: Applying Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM Matching Match each of the following items (a–h) with the appropriate definition below. a. Freight b. Delivery Expense c. Merchandise Inventory d. Sales discount e. Purchases Returns and Allowances f. Debit memo g. Purchase discount h. Trade discount DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Easy Bloom's: Remembering Matching False ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP

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Chapter 6 - Accounting for Merchandising Businesses ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 167. Discount taken by the buyer for early payment of invoice. ANSWER: g POINTS: 1 168. Account used to record merchandise on hand under a perpetual inventory system. ANSWER: c POINTS: 1 169. Early payment discount offered to customers by the seller. ANSWER: d POINTS: 1 170. Expense account for recording shipping costs paid by the seller. ANSWER: b POINTS: 1 171. Discount to government agencies or customers who purchase large quantities of merchandise. ANSWER: h POINTS: 1 172. Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system. ANSWER: e POINTS: 1 173. The cost associated with delivery of merchandise to the customer. ANSWER: a POINTS: 1 174. Informs the seller of the reasons for the return of merchandise or the request for a price allowance. ANSWER: f POINTS: 1 Match each of the following terms (a–h) with the correct definition below. a. Credit terms b. FOB destination c. FOB shipping point d. Periodic inventory system Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses e. Perpetual inventory system f. Inventory shrinkage g. Single-step income statement h. Multiple-step income statement DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-03 - 06-03 ACCT.WARD.18.06-04 - 06-04 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 175. Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise. ANSWER: b POINTS: 1 176. Losses of inventory due to theft, damage, spoilage, etc., that cause the actual inventory on hand to be less than that on record. ANSWER: f POINTS: 1 177. Statement where net income is determined by deducting all expenses from all revenues. ANSWER: g POINTS: 1 178. Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered. ANSWER: a POINTS: 1 179. Inventory system that updates the merchandise inventory account for every purchase and sales transaction. ANSWER: e POINTS: 1 180. Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand. ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses 181. Statement that includes subtotals for net sales, gross profit, and net operating income in determining net income. ANSWER: h POINTS: 1 182. Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier. ANSWER: c POINTS: 1 Subjective Short Answer 183. Discuss the following statement: “Operating cycles for all merchandising businesses are the same, with similar profit margins.” Include an example(s) to illustrate your explanation. ANSWER:

This is not true. While the operations of merchandising businesses generally all involve the purchase of merchandise (purchasing), the sale of products to customers (sales), and the receipt of cash from customers (collection), operating cycles may vary in length between merchandisers. This is due to the nature of the product they sell. An example is a grocery store that depends on selling more products in a very short time span. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 184. Describe the major differences in preparing the financial statements for a service business and a merchandising business.

Service Business Income Statement:

Merchandising Business Income Statement:

Balance Sheet:

ANSWER: Service Business Income Statement:

Merchandising Business Income Statement:

Revenues Less operating expenses Equals operating income

Sales Less cost of merchandise sold Equals gross profit Less operating expenses Equals operating income

Balance Sheet:

No merchandise inventory account

Includes merchandise inventory account in the current assets section

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 185. Complete the following data taken from the condensed income statements for merchandising Companies A, B, and C.

Operating income Sales Gross profit Operating expenses Cost of merchandise sold

Company A $315 ? 430 ? 545

Company B $ ? 865 ? 125 320

ANSWER: Operating income Sales Gross profit Operating expenses Cost of merchandise sold

Company C $215 560 325 ? ?

Company A Company B Company C $315 $420 $215 975 865 560 430 545 325 115 125 110 545

320

235

OR rearranged in the order of the income statement: Company A Company B Company C Sales $975 $865 $560 Less cost of merchandise sold 545 320 235 Gross profit 430 545 325 Less operating expenses 115 125 110 Operating income 315 420 215 POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 186. Complete the following data taken from the condensed income statements for merchandising Companies X, Y, and Z.

Operating income (loss) Sales Gross profit Operating expenses Cost of merchandise sold

Company X $220 ? 435 ? 330

Company Y $ ? 1,315 ? 565 775

ANSWER: Operating income (loss) Sales Gross profit Operating expenses Cost of merchandise sold

Company Z $ (70) 890 465 ? ?

Company X Company Y Company Z $220 $ (25) $ (70) 765 1,315 890 435 540 465 215 565 535 330 775 425

OR rearranged in the order of the income statement: Company X Company Y Company Z Sales $765 $1,315 $890 Less cost of merchandise sold 330 775 425 Gross profit 435 540 465 Less operating expenses 215 565 535 Operating income (loss) 220 (25) (70) POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 187. During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the merchandise sold is $322,325. What is the amount of the gross profit? ANSWER: POINTS: DIFFICULTY:

$137,500 + $425,600 – $322,325 = $240,775 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 188. During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the merchandise sold is $157,400. What is the amount of the gross profit? ANSWER: POINTS: DIFFICULTY:

$117,500 + $241,750 – $157,400 = $201,850 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 189. During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the merchandise sold is $76,240. What is the amount of the gross profit? ANSWER:

Total Sales, $179,950 – Cost of Merchandise Sold, $76,240 = Gross Profit, $103,710 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 190. Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period. Under a perpetual inventory system, record the journal entries required for the above transactions. ANSWER:

Merchandise Inventory Accounts Payable

5,586

Accounts Payable Cash

5,586

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 191. On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax percentage is 7.5%. Record the transaction. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date Description Mar. 25 Accounts Receivable Sales Sales Tax Payable

Post. Ref.

Debit Credit 10,750 10,000 750

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 192. On March 29, customers who owe $10,500 on account to Sonic Sales Company submit payments of $4,250. Journalize this event. ANSWER:

Mar. 29 Cash Accounts Receivable

4,250 4,250

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 193. Journalize the following merchandise transactions: (a) (b)

Sold merchandise on account, $17,300, with terms 2/10, net 30. The cost of the merchandise sold was $12,600. Received payment within the discount period.

ANSWER:

(a)

(b)

Accounts Receivable Sales

16,954

Cost of Merchandise Sold Merchandise Inventory

12,600

Cash

16,954 Accounts Receivable

16,954

12,600

16,954

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 194. Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Freight Paid by Freight Terms Seller $4,500 $140FOB shipping point, 2/10, net 30 7,650 $200FOB destination, 1/10, net 45

Merchandise (a) (b)

ANSWER:

Returns and Allowances $1,200 450

(a) $3,374

(b) $7,128 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

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Chapter 6 - Accounting for Merchandising Businesses 195. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the merchandise sold is $38,500. Batson Co. paid the invoice within the discount period. Prepare the entries that both Sampson and Batson would record for the above. Assume both Sampson and Batson use a perpetual inventory system. ANSWER:

Sampson Co. Journal Entries: Accounts Receivable—Batson Co.

45,080

Sales

Cost of Merchandise Sold

45,080

38,500

Merchandise Inventory

Cash

38,500

45,080 Accounts Receivable—Batson Co.

45,080

Batson Co. Journal Entries: Merchandise Inventory

45,080 45,080

Accounts Payable—Sampson Co.

Accounts Payable—Sampson Co. Cash

45,080 45,080

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses 196. Which of the following costs would be included in merchandise inventory? (a) Purchase price (b) Insurance in transit FOB shipping point (c) Freight for delivery FOB shipping point (d) Repair due to negligence of receiving clerk (e) Receiving department employee salary (f) Cost of processing purchase orders ANSWER: POINTS: DIFFICULTY:

(a), (b), and (c) 1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 197. On March 4, Micro Sales makes $4,850 in sales on bank credit cards that charge a 2.5% service charge and deposits the funds into Micro Sales' bank accounts at the end of the business day. Journalize the sales and recognition of expense as a single journal entry. ANSWER:

Mar. 4

Cash Credit Card Expense Sales

4,728.75 121.25 4,850.00

The sales can be debited to Cash since the deposit is at the end of the business day. Also, since the credit card expense is easily determined (2.5% of sales), that expense can be immediately identified and should be recorded. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 198. Journalize the following transactions for Armour Inc. using both the periodic inventory system and the perpetual inventory system, presented in the side-by-side format of the form provided below. Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses Oct.7 Sold merchandise on credit to Rondo Distributors, terms n/30. The cost of the merchandise was $720. 8 Purchased merchandise, $10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of $525 added to the invoice. PERPETUAL INVENTORY SYSTEM

PERIODIC INVENTORY SYSTEM

Date

Description

Dr.

Cr.

Description

Dr.

Cr.

| | | | | | |

ANSWER: PERPETUAL INVENTORY SYSTEM Dr. Cr. Description Dr. Cr. Accounts 1,200 Receivable 1,200 1,200 Sales 1,200

PERIODIC INVENTORY SYSTEM Date Description Oct. Accounts 7 Receivable Sales

Purchases

9,800

Freight In

525

Accounts Payable

Cost of Merchandise Sold 720 Merchandise Inventory 720 Merchandise Inventory 10,325 Accounts Payable 10,325 10,325

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Accounting for Merchandising Businesses

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 3:54 PM 2/23/2017 8:33 AM

199. What is the normal balance of the following accounts? a. Sales Tax Payable b. Merchandise Inventory c. Delivery Expense d. Cost of Merchandise Sold e. Customer Refunds Payable f. Estimated Returns Inventory g. Sales ANSWER:

a. credit b. debit c. debit d. debit e. credit f. debit g. credit POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 107

Chapter 6 - Accounting for Merchandising Businesses 200. For each of the following, calculate the cost of inventory reported on the balance sheet. (a) The total merchandise on hand at the end of the year is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier. (b) The total merchandise inventory at the end of the year was $63,000. Excluded from the amount were purchases of $6,000 in transit under FOB shipping point terms. (c) The total merchandise inventory at the end of the year was $75,000. Excluded from the amount were purchases of $5,000 in transit under FOB destination terms. (a) $62,000 (b) $69,000 (c) $75,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM ANSWER:

Page 108

Chapter 6 - Accounting for Merchandising Businesses 201. Using the perpetual inventory system, journalize the entries for the following selected transactions: (a) Sold merchandise on account, for $12,000, terms n/30. The cost of the merchandise sold was $6,500. (b) Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the merchandise sold was $5,300. (c) Sold merchandise to customers who used American Express, $2,900. The cost of the merchandise sold was $1,700. (d) Paid an invoice from First National Bank for $385, representing a service fee for processing MasterCard and VISA sales. (e) Paid a $75 processing fee associated with sales made to customers who used American Express. ANSWER:

(a) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory (b) Cash Sales Cost of Merchandise Sold Merchandise Inventory (c) Cash Sales Cost of Merchandise Sold Merchandise Inventory (d) Credit Card Expense Cash

(e) Credit Card Expense Cash POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

12,000 12,000 6,500 6,500 9,500 9,500 5,300 5,300 2,900 2,900 1,700 1,700 385 385 75 75

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Chapter 6 - Accounting for Merchandising Businesses 202. Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB destination, 2/10, n/30. The seller prepays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise costing $425 that is returned. Payment is received within the discount period. The company uses a perpetual inventory system. Record the foregoing transactions of the seller in the sequence indicated below. (a) Sold the merchandise, recognizing the sale and cost of merchandise sold. (b) Paid the freight charges. (c) Issued the credit memo. (d) Received payment from the customer. ANSWER:

(a) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory

4,116 4,116 2,300 2,300

(b) Delivery Expense Cash

735

Merchandise Inventory Estimated Returns Inventory (d) Cash Accounts Receivable

735 425 425 3,381 3,381

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 203. Based on the information below, journalize the entries for the seller and the buyer. Both use a perpetual inventory system. (a) (b)

Seller sold merchandise on account to the buyer, $4,750, terms 2/10, net 30, FOB shipping point. The cost of the merchandise is $2,850. The seller prepays the freight of $75. Buyer returns $700 of merchandise as defective. The cost of the merchandise is $420.

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Chapter 6 - Accounting for Merchandising Businesses (c)

Buyer pays within the discount period.

Seller Description

ANSWER:

Buyer Dr.

Cr.

Description

Dr.

Cr.

(a) Seller Buyer Description Dr. Cr. Description Dr. Cr. Accounts 4,655 Merchandise Inventory 4,730 Receivable Sales 4,655 Accounts Payable 4,730 Cost of 2,850 Merchandise Sold Merchandise 2,850 Inventory Accounts Receivable Cash

(b) Customer Refunds Payable Accounts Receivable

Accounts Payable

686 686

Merchandise Inventory

686 686

Merchandise Inventory 420 Estimated Returns 420 Inventory (c) 3,969 Cash Accounts Payable 3,969 3,969 3,969 Accounts Receivable Cash

POINTS:

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Chapter 6 - Accounting for Merchandising Businesses DIFFICULTY:

Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 204. Details of a purchase invoice and related credit memo are summarized as follows: Invoice:

Cost of merchandise listed on purchase invoice Prepaid freight charge added to invoice Terms, FOB shipping point, 1/10, n/eom

Credit memo: Cost of merchandise returned

$6,500 150

$1,500

Assume that the credit memo was received prior to payment and that the invoice is paid within the discount period. Determine the following: (a) (b) (c)

Amount of the cash discount allowed. Amount to be paid by the purchaser if the discount is taken. Cost of the merchandise to the purchaser if the discount is not taken.

(a) $50 (b) $5,100 (c) $5,150 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM ANSWER:

Page 112

Chapter 6 - Accounting for Merchandising Businesses 205. Conquest Company uses a perpetual inventory system. Conquest purchased $1,500 of merchandise on account and payment was made within the discount period. The credit terms were 2/10, n/30. Journalize Conquest’s purchase and payment. ANSWER:

(a) Merchandise Inventory Accounts Payable

(b) Accounts Payable Cash POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

1,470 1,470 1,470 1,470

Page 113

Chapter 6 - Accounting for Merchandising Businesses 206. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point, 1/10, n/30. The seller prepaid freight costs of $100. Prior to payment, $1,600 of the merchandise is returned. The invoice is paid within the discount period. Record the foregoing transactions of the buyer in the sequence indicated below, assuming a perpetual inventory system is used. (a) (b) (c)

Purchased the merchandise. Recorded receipt of the credit memo for merchandise returned. Paid the amount owed.

ANSWER:

(a) Merchandise Inventory Accounts Payable

4,753

(b) Accounts Payable Merchandise Inventory

1,584

(c) Accounts Payable Cash POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

4,753

1,584 3,169 3,169

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Chapter 6 - Accounting for Merchandising Businesses 207. Details of invoices for purchases of merchandise are as follows:

(a) (b) (c) (d)

Merchandise $2,800 7,600 1,400 500

Freight $45 60 55 50

Terms FOB shipping point, 1/10, n/30 FOB destination, n/30 FOB shipping point, 2/10, n/30 FOB destination, 1/10, n/30

Returns and Allowances $200 800 600 0

Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. (a) $2,800 – $200 – $26 + $45 = $2,619 (b) $7,600 – $800 = $6,800 (c) $1,400 – $600 – $16 + $55 = $839 (d) $500 – $5 = $495 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM ANSWER:

Page 115

Chapter 6 - Accounting for Merchandising Businesses 208. Journalize the entries to record the following selected transactions: (a) (b)

Sold $900 of merchandise on account, subject to 7% sales tax. The cost of the merchandise sold was $510. Paid $436 to the state sales tax department for taxes collected. (a) Accounts Receivable Sales Sales Tax Payable

ANSWER:

963 900 63

Cost of Merchandise Sold Merchandise Inventory (b) Sales Tax Payable Cash POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

510 510 436 436

209. Gadget Palace is a retailer selling unique hardware. Gadget Palace uses a perpetual inventory system. Journalize the following transactions: July 5 Gadget Palace purchases inventory for sale from Turbo Tools for $11,400 with terms 2/10, n/30. 6 Gadget Palace pays Fast Truck Transport $75 for freight on the July 5 order. 8 Gadget Palace receives a credit memo from Turbo Tools for $215 for damaged merchandise. 15 Gadget Palace pays Turbo Tools the balance due. Journal Date

Description

Post. Ref.

Debit

Credit

Page 116

Chapter 6 - Accounting for Merchandising Businesses

ANSWER: Journal Date

Description

Post. Ref.

Debit

July 5 Merchandise Inventory A/P—Turbo Tools

11,172.00

6 Merchandise Inventory Cash

75.00

8 A/P—Turbo Tools Merchandise Inventory

210.70

15 A/P—Turbo Tools Cash

Credit

11,172.00

75.00

210.70 10,961.30 10,961.30

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:56 AM 210. Bargain Wholesalers sells pet supplies to retailers including Pet World Supplies. Bargain Wholesalers uses a perpetual inventory. Journalize the following transactions: May 4Bargain Wholesalers sells inventory to Pet World Supplies for $8,250 with terms 1/10, n/30. The cost of the merchandise is $5,755. Copyright Cengage Learning. Powered by Cognero.

Page 117

Chapter 6 - Accounting for Merchandising Businesses 7Bargain Wholesalers sells an additional $10,985 in inventory to Pet World Supplies with terms 1/10, n/30. The cost of the merchandise is $6,925. 13Bargain Wholesalers receives a check from Pet World Supplies paying the balance due on both invoices.

Date

Journal Post. Ref.

Description

Debit

Credit

ANSWER: Date

Description

May 4 A/R—Pet World Supplies Sales Cost of Merchandise Sold Merchandise Inventory 7A/R—Pet World Supplies Sales

Journal Post. Ref.

Debit

Credit

8,167.50 8,167.50 5,755.00 5,755.00

10,875.15 10,875.15

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Chapter 6 - Accounting for Merchandising Businesses Cost of Merchandise Sold Merchandise Inventory

6,925.00 6,925.00

13Cash A/R—Pet World Supplies

19,042.65 19,042.65

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:56 AM 211. Marshall Supplies is a janitorial supply store that uses perpetual inventory. Journalize the following transactions: July 4Marshall purchases inventory for sale from Tidy Wholesalers for $8,500 with terms 1/10, n/30. 5Marshall pays Express Transfer $45 for freight on the July 4 order. 7Marshall buys an additional $11,985 in inventory from Tidy Wholesalers with terms 1/10, n/30. 13Marshall pays Tidy Wholesalers the balance due on both invoices.

Date

Description

Journal Post. Ref.

Debit

Credit

Page 119

Chapter 6 - Accounting for Merchandising Businesses

ANSWER: Journal Date

Description

July 4 Merchandise Inventory A/P—Tidy Wholesalers 5Merchandise Inventory Cash

Post. Ref.

Debit

Credit

8,415.00 8,415.00 45.00 45.00

7 Merchandise Inventory A/P—Tidy Wholesalers

11,865.15

13 A/P—Tidy Wholesalers Cash

20,280.15

11,865.15

20,280.15

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses DATE CREATED: DATE MODIFIED:

1/16/2017 3:54 PM 2/23/2017 8:57 AM

212. On March 3, Bluebird Sales makes $4,350 in cash sales of general merchandise that has a cost of $1,512. Bluebird uses a perpetual inventory system. (a) Journalize the sale. (b) Journal the cost of merchandise sold. ANSWER:

(a) Mar. 3 Cash

4,350 Sales

4,350

(b) Mar. 3 Cost of Merchandise Sold 1,512 Merchandise Inventory POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

1,512

213. On March 5, Blowout Sales makes $22,500 in sales on account. The cost of merchandise sold is $16,825. Journalize the sales and recognition of the cost of merchandise sold. ANSWER:

Mar. 5 Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory

22,500 22,500 16,825 16,825

POINTS: DIFFICULTY:

Page 121

Chapter 6 - Accounting for Merchandising Businesses 214. On March 15, Monroe Sales sells $9,525 on account to Garrison Brewer with terms of 2/10, n/30. The cost of merchandise sold was $6,905. (a) Journalize the sale and the recognition of the cost of the sale. (b) On March 20, a $125 credit memo is given to Garrison Brewer due to merchandise that was the wrong color. Journalize this event. The cost of the returned merchandise was $65. (c) On March 25, Garrison Brewer submits payment in full. Journalize this event. ANSWER:

(a) Accounts Receivable—Garrison Brewer Sales Cost of Merchandise Sold Merchandise Inventory (b) Customer Refunds Payable

9,334.50 9,334.50 6,905.00 6,905.00 122.50 122.50

Accounts Receivable—Garrison Brewer

Merchandise Inventory

65.00

Estimated Returns Inventory

65.00

Accounts Receivable—Garrison Brewer

9,212.00

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 215. Journalize the following transactions assuming a perpetual inventory system: May 5 Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30. Prepaid freight costs of $100 were added to the invoice. 12

Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on

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Chapter 6 - Accounting for Merchandising Businesses May 5. 14

Paid Archie Co. for invoice of May 5, less debit memo of May 12 and discount.

Journal Date

Post. Ref.

Description

Debit

Credit

ANSWER: Journal Date

Description

May 5

Merchandise Inventory

Post. Ref.

Debit Credit 5,980

Accounts Payable

5,980 2,450

Merchandise Inventory

Accounts Payable Cash

2,450 3,530 3,530

POINTS: DIFFICULTY:

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Chapter 6 - Accounting for Merchandising Businesses

DATE CREATED: DATE MODIFIED:

ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 1/16/2017 3:54 PM 2/23/2017 8:52 AM

216. Record the following transactions for Sparky’s Pet Shop using the general journal form provided below. Assume Sparky’s uses a perpetual inventory system. Omit transaction descriptions from entries. Date Aug. 1 3 7 10 11 20

Transaction Purchased $6,000 of merchandise on account, terms 2/10, n/30. Returned $1,500 of merchandise purchased on August 1 due to defects. Recorded cash sales for the first week of August, $9,750; cost of the merchandise was $4,000. Made sale on account to a local breeder for $500, terms 1/10, net 30; cost of the merchandise was $200. Paid for the merchandise purchased on August 1, less return. Received payment from sale of August 10. The customer took the discount. Journal

Date

Description

Post. Ref.

Debit

Credit

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Chapter 6 - Accounting for Merchandising Businesses Journal

ANSWER: Date Description Aug. 1 Merchandise Inventory Accounts Payable

Post. Ref. Debit Credit 5,880 5,880

3 Accounts Payable Merchandise Inventory

1,470

7 Cash Sales

9,750

7 Cost of Merchandise Sold Merchandise Inventory

4,000

10 Accounts Receivable Sales

495

10 Cost of Merchandise Sold Merchandise Inventory

200

11 Accounts Payable Cash

4,410

20 Cash Accounts Receivable

495

1,470

9,750

4,000

495

200

4,410

495

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:53 AM 217. Journalize the following transactions for both Abbott Co. (seller) and Dalton Co. (buyer). Assume both the companies use the perpetual inventory system. July 3

Abbott Co. sold merchandise on account to Dalton Co., $7,500, terms FOB shipping point, n/eom. The cost of the merchandise sold was $4,400.

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Chapter 6 - Accounting for Merchandising Businesses 5 9 11

Dalton Co. paid $275 freight charges on purchase from Abbott Co. Abbott Co. issued Dalton Co. a credit memo for merchandise returned, $2,250. The cost of the merchandise returned was $1,325. Abbott Co. received payment from Dalton Co. for purchase of July 3.

Date

Abbott Co. Description Debit Credit

Dalton Co. Description Debit Credit

ANSWER: Abbott Co.

Dalton Co.

Date Description DebitCredit Description July Accounts 7,500 Merch. Inventory 3 Receivable Sales Cost of Merch. Sold

DebitCredit 7,500

7,500Accounts Payable

7,500

4,400

Merch. Inventory

4,400

Merch. Inventory

275

Cash

Customer Refunds Payable 2,250

Accounts Payable

275

2,250 Page 126

Chapter 6 - Accounting for Merchandising Businesses 2,250

Accounts Rec.

Merchandise Inventory

Accounts Rec.

2,250

1,325

Est. Returns Inventory

11 Cash

Merch. Inventory

1,325

5,250

Accounts Payable 5,250

Cash

5,250 5,250

POINTS: DIFFICULTY:

Page 127

Chapter 6 - Accounting for Merchandising Businesses 218. Using the list of accounts below, construct a chart of accounts for a merchandising business that rents out a portion of its building, and assign account numbers and arrange the accounts in balance sheet and income statement order (“1” for assets, and so on). Each account number should have three digits. Contra accounts should be designated with a decimal of the account (100.1 for contra of account 100). Assets and liabilities should be in order of liquidity; expenses should be in alphabetical order. Accounts Payable Interest Expense Accounts Receivable Land Accumulated Depr.—Equip. Merchandise Inventory Advertising Expense Notes Payable

Salaries Payable Sales Supplies Expense Unearned Revenue

Cash Cost of Merchandise Sold Depreciation Expense— Equip. Equipment

Utilities Expense

ANSWER:

Office Supplies Owner, Capital Owner, Drawing Rent Revenue Salaries Expense

Acct. No. Description 100 Cash 103 Accounts Receivable 105 Merchandise Inventory 107 Office Supplies 110 120 120.1 200 202 204 207 300

Land Equipment Accumulated Depr.— Equip. Accounts Payable Salaries Payable Unearned Revenue Notes Payable Owner, Capital

Acct. No. Description 302 Owner, Drawing 400 Sales 500 Cost of Merchandise Sold 502 Advertising Expense Depreciation Expense– 504 Equip. 506 Salaries Expense 508 510 600 700

Supplies Expense Utilities Expense Rent Revenue Interest Expense

POINTS: DIFFICULTY:

Page 128

Chapter 6 - Accounting for Merchandising Businesses 219. Journalize the following transactions for Evans Company. Assume the company uses a perpetual inventory system. (a) (b) (c) (d)

Sold merchandise for $645 cash. The cost of merchandise sold was $375. Sold merchandise for $432 and accepted VISA as the form of payment. The cost of merchandise sold was $195. Sold merchandise on account for $670. The cost of merchandise sold was $438. Paid credit card fees for the month of $85. Journal

Date

Post. Ref.

Description

Debit

Credit

ANSWER: Journal Date (a)

Description Cash

Post. Ref.

Debit Credit 645

Sales

(b)

645

Cost of Merchandise Sold Merchandise Inventory

375

Cash

432

375

Sales Cost of Merchandise Sold Merchandise Inventory Copyright Cengage Learning. Powered by Cognero.

432 195 195 Page 129

Chapter 6 - Accounting for Merchandising Businesses (c)

(d)

Accounts Receivable Sales

670

Cost of Merchandise Sold Merchandise Inventory

438

Credit Card Expense Cash

670

438

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:58 AM 220. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold is $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions? ANSWER:

Sales [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – Cost of Merchandise Sold ($24,500 – $1,700) = Gross Profit $7,972 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 130

Chapter 6 - Accounting for Merchandising Businesses 221. Calculate the gross profit for Jonas Company based on the following data: Sales Selling expenses Cost of merchandise sold

$764,000 52,500 538,000

ANSWER: POINTS: DIFFICULTY:

Sales, $764,000 – Cost of Merchandise Sold, $538,000 = Gross Profit, $226,000 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 222. Which of the following accounts would be included in the chart of accounts of a merchandising company using the (a) periodic inventory system, (b) perpetual inventory system, or (c) both systems? (1) Purchases (2) Merchandise Inventory (3) Sales (4) Purchases Discounts (5) Cost of Merchandise Sold (6) Freight In (7) Delivery Expense ANSWER: POINTS: DIFFICULTY:

(1) a (2) c (3) c (4) a (5) b (6) a (7) c 1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 131

Chapter 6 - Accounting for Merchandising Businesses 223. Using the letter preceding each account, arrange the following selected accounts in the order they would normally appear in a chart of accounts of a company that uses a multiple-step income statement. (a) (b) (c) (d) (e) (f) (g)

Accounts Payable Accounts Receivable Merchandise Inventory Miscellaneous Selling Expense Interest Expense Misc. Admin. Expense Freight Out

ANSWER:

(b) (c) (a) (g) (d) (f) (e)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 224. Journalize the following transactions assuming the perpetual inventory system: Sold merchandise on account for $3,750 including terms. The cost of the July 3 merchandise sold was $2,000. 5 Issued credit memo for $1,050 for merchandise returned from sale on July 3. The cost of the merchandise returned was $610. 12 Received check for the amount due for sale on July 3 less return on July 5. 17 Sold merchandise for $7,000 plus 6% sales tax to cash customers. The cost of the merchandise sold was $3,830.

Date

Description

Journal Post. Ref.

Debit

Credit

Page 132

Chapter 6 - Accounting for Merchandising Businesses

ANSWER: Journal Date Description July Accounts Receivable 3 Sales

Cost of Merchandise Sold

Post. Ref. Debit Credit 3,750 3,750 2,000

Merchandise Inventory

Customer Refunds Payable

2,000 1,050

Accounts Receivable

Merchandise Inventory

1,050 610

Estimated Returns Inventory

Cash

610 2,700

Accounts Receivable

Cash

2,700 7,420

Sales Sales Tax Payable

Cost of Merchandise Sold Merchandise Inventory

7,000 420 3,830 3,830

Page 133

Chapter 6 - Accounting for Merchandising Businesses POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 9:00 AM 225. Madison Company’s perpetual inventory records indicate that $875,300 of merchandise should be on hand on October 31. The physical inventory indicates that $781,900 is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 31. ANSWER:

Oct. 31

Cost of Merchandise Sold Merchandise Inventory

93,400 93,400

POINTS: DIFFICULTY:

1 Bloom's: Applying Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM

Page 134

Chapter 6 - Accounting for Merchandising Businesses 226. Selected accounts and amounts appear below. Journalize the closing entry, assuming a perpetual inventory system. $ 45,500 652,500

Merchandise inventory Cost of merchandise sold

ANSWER:

Owner, Capital Cost of Merchandise Sold

652,500 652,500

POINTS: DIFFICULTY:

Page 135

Chapter 6 - Accounting for Merchandising Businesses 227. The records of Penny Co. indicated that $415,000 of merchandise should be on hand on December 31. The physical inventory indicates that $370,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year ended December 31. Journal

Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date Description Dec. 31 Cost of Merchandise Sold Merchandise Inventory

Post. Ref.

Debit Credit 45,000 45,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 8:24 AM 228. Prepare (a) a single-step income statement, (b) a statement of owner's equity, and (c) a balance sheet in report form from the following data for Burt Co., taken from the ledger after adjustments on December 31, the end of the fiscal year. Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment Administrative Expenses Cash Cost of Merchandise Sold Interest Expense Maeve Burt, Capital Maeve Burt, Drawing Merchandise Inventory Copyright Cengage Learning. Powered by Cognero.

$97,200 64,300 72,750 162,100 56,500 53,000 121,700 12,000 81,750 52,000 93,250 Page 136

Chapter 6 - Accounting for Merchandising Businesses Note Payable (due in two years) Office Equipment Prepaid Insurance Rent Revenue Salaries Payable Sales Selling Expenses Store Equipment Supplies

ANSWER:

154,000 149,750 6,500 17,500 28,700 365,500 41,500 325,000 4,000 (a) Burt Co. Income Statement For the Year Ended December 31 Revenues: Sales Rent revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Interest expense Total expenses Net income

$365,500 17,500 $383,000 $121,700 41,500 56,500 12,000 231,700 $151,300

(b) Burt Co. Statement of Owner's Equity For the Year Ended December 31 Maeve Burt, capital, January 1 Net income for the year Withdrawals Increase in owner's equity Maeve Burt, capital, December 31

$ 81,750 $151,300 (52,000) 99,300 $181,050

(c) Burt Co. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Copyright Cengage Learning. Powered by Cognero.

$53,000 64,300 Page 137

Chapter 6 - Accounting for Merchandising Businesses Merchandise inventory Prepaid insurance Supplies Total current assets Property, plant, and equipment: Store equipment Less accum. depreciation Office equipment Less accum. depreciation Total property, plant, and equipment Total assets

93,250 6,500 4,000 $221,050 $325,000 162,100 $162,900 $149,750 72,750 77,000 239,900 $460,950

Liabilities Current liabilities: Accounts payable Salaries payable Total current liabilities Long-term liabilities: Note payable (due in two years) Total liabilities

$97,200 28,700 $125,900 154,000 $279,900

Owner's Equity Maeve Burt, capital Total liabilities and owner's equity

181,050 $460,950

POINTS: DIFFICULTY:

Page 138

Chapter 6 - Accounting for Merchandising Businesses 229. Prepare a multiple-step income statement for Armstrong Co. from the following data for the year ended December 31. Sales, $755,000; cost of merchandise sold, $330,000; administrative expenses, $35,000; interest expense, $30,000; rent revenue, $25,000; selling expenses, $50,000. ANSWER: Armstrong Co. Income Statement For the Year Ended December 31 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense Net income

$755,000 330,000 $425,000 $50,000 35,000 85,000 $340,000 $25,000 (30,000)

(5,000) $335,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 9:10 AM 230. Selected data from the ledger of Burt Co., after adjustments, on September 30, the end of the fiscal year, are listed as follows: Accounts Receivable Accumulated Depreciation Administrative Expenses Bob Burt, Capital Bob Burt, Drawing Cost of Merchandise Sold Interest Revenue

$ 39,120 60,540 90,000 85,000 65,000 550,000 10,000

Office Equipment Prepaid Insurance Note Payable Salaries Payable Sales Selling Expenses Supplies

$ 82,700 4,680 77,750 3,060 950,000 102,000 3,125 Page 139

Chapter 6 - Accounting for Merchandising Businesses Prepare a single-step income statement and a statement of owner's equity. ANSWER: Burt Co. Income Statement For the Year Ended September 30 Revenues: Sales Interest revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Total expenses Net income

$950,000 10,000 $960,000 $550,000 102,000 90,000 742,000 $218,000

Burt Co. Statement of Owner's Equity For the Year Ended September 30 Bob Burt, capital, October 1 Net income for the year Withdrawals Increase in owner's equity Bob Burt, capital, September 30

$ 85,000 $218,000 (65,000) 153,000 $238,000

POINTS: DIFFICULTY:

Page 140

Chapter 6 - Accounting for Merchandising Businesses 231. The following data for the current year ended June 30 are from the accounting records of Zanadu Co.: Administrative expenses Cost of merchandise sold Interest expense Rent revenue Sales Selling expenses

$ 28,750 181,440 3,600 1,500 534,440 65,000

Prepare a multiple-step income statement for the year ended June 30. ANSWER: Zanadu Co. Income Statement For the Year Ended June 30 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense Net income

$534,440 181,440 $353,000 $65,000 28,750 93,750 $259,250 $ 1,500 (3,600)

(2,100) $257,150

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 9:12 AM

Page 141

Chapter 6 - Accounting for Merchandising Businesses 232. Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250

Gross Profit = Sales – COMS* = $1,860,000 – $1,042,300** = $817,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, April 1

$ 193,250

Cost of merchandise purchased: Purchases

$1,079,600

Purchases returns and allowances

(51,200)

Purchases discounts

(18,500)

Net purchases Freight in Total cost of merchandise purchased

$1,009,900 19,250 1,029,150

Merchandise available for sale

$1,222,400

Merchandise inventory, March 31

(180,100)

Cost of merchandise sold

$1,042,300

POINTS: DIFFICULTY:

Page 142

Chapter 6 - Accounting for Merchandising Businesses 233. Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250 Cost of merchandise sold:

Merchandise inventory, April 1

$193,250

Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased

$1,079,600 (51,200) (18,500) $1,009,900 19,250 1,029,150

Merchandise available for sale

$1,222,400

Merchandise inventory, March 31 Cost of merchandise sold

(180,100) $1,042,300

POINTS: DIFFICULTY:

Page 143

Chapter 6 - Accounting for Merchandising Businesses 234. Using the following data taken from Payton Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250

Cost of merchandise sold: Merchandise inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, May 31 Cost of merchandise sold

$393,250 $1,579,600 (81,200) (16,500) $1,481,900 59,250 1,541,150 $1,934,400 (380,100) $1,554,300

POINTS: DIFFICULTY:

Page 144

Chapter 6 - Accounting for Merchandising Businesses 235. Using the following data taken from Connor Inc., determine the gross profit to be reported on the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250

Gross Profit = Sales – COMS* = $2,060,000 – $1,554,300** = $505,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in

$393,250 $1,579,600 (81,200) (16,500) $1,481,900 59,250

Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, May 31 Cost of merchandise sold

1,541,150 $1,934,400 380,100 $1,554,300

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:54 PM DATE MODIFIED: 2/23/2017 9:18 AM 236. The following data were extracted from the accounting records of Dana Designs for the year ended March 31. Copyright Cengage Learning. Powered by Cognero.

Page 145

Chapter 6 - Accounting for Merchandising Businesses Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in

$530,000 375,000 270,000 25,000 10,000 770,000 3,000

Prepare the cost of merchandise sold section of the income statement for the year ended March 31, using the periodic method.

ANSWER: Dana Designs Income Statement For the Year Ended March 31 Sales Cost of merchandise sold: Merchandise inventory, April 1 Cost of merchandised purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased

$770,000 $530,000 $270,000 (25,000) (10,000) $235,000 3,000 238,000

Merchandise available for sale

$768,000

Merchandise inventory, March 31

(375,000)

Cost of merchandise sold

393,000

Gross profit

$377,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Copyright Cengage Learning. Powered by Cognero.

Page 146

Chapter 6 - Accounting for Merchandising Businesses DATE CREATED: DATE MODIFIED:

1/16/2017 3:54 PM 2/23/2017 9:19 AM

237. Based upon the following data for a business with a periodic inventory system, determine the cost of merchandise sold for August. Merchandise inventory, August 1 Merchandise inventory, August 31 Purchases Purchases returns and allowances Purchases discounts Freight in ANSWER:

$ 75,560 96,330 373,880 14,760 10,900 4,135

Cost of merchandise sold: Merchandise inventory, August 1

$ 75,560

Cost of merchandise purchased: Purchases

$373,880

Purchases returns and allowances

(14,760)

Purchases discounts

(10,900)

Net purchases

$348,220

Freight in Total cost of merchandise purchased

4,135 352,355

Merchandise available for sale

$427,915

Merchandise inventory, August 31

(96,330)

Cost of merchandise sold

$331,585

POINTS: DIFFICULTY:

Page 147

Chapter 7 - Inventories True / False 1. One of the two internal control procedures over inventory is to properly report inventory on the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 2. A purchase order establishes an initial record of the receipt of the inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 7 - Inventories 3. A perpetual inventory system is an effective means of control over inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 7 - Inventories 5. Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 6. Inventory controls start when the merchandise is shelved in the store area. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 7 - Inventories 7. A physical inventory should be taken at the end of every month. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 8. The specific identification inventory method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 7 - Inventories 9. The choice of an inventory costing method has no significant impact on the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 10. Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 5

Chapter 7 - Inventories 11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 12. FIFO is the inventory costing method that follows the physical flow of the goods. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 7 - Inventories 13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 14. The weighted average inventory cost flow method is the least used of the inventory costing methods. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 7 - Inventories 15. If the perpetual inventory system is used, the merchandise inventory account is debited for purchases of merchandise. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 16. Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 8

Chapter 7 - Inventories 17. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 18. The three inventory costing methods will normally each yield different amounts of net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 7 - Inventories 19. The average cost method will always yield results between FIFO and LIFO. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 23. During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 25. In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 26. Unsold consigned merchandise should be included in the consignee's inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 27. If ending inventory for the year is understated, net income for the year is overstated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 28. If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 29. The lower of cost or market is a method of inventory valuation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 30. "Market" as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 31. A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 32. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 33. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item-by-item basis, by major classification of inventory, or by the total inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 35. It is not unusual for large companies to use different inventory costing methods for different segments of their inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 7:57 AM 36. Direct disposal costs do not include special advertising or sales commissions. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 37. Inventory errors, if not discovered, will self-correct within two years. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 38. Generally, the lower the days' sales in inventory, the better. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:02 AM

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Chapter 7 - Inventories 39. One negative effect of carrying too much inventory is risk that customers will change their buying habits. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by 2. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 41. Inventory turnover measures the length of time it takes to acquire, sell, and replace the inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 42. In the retail inventory method, the cost to retail ratio is equal to the cost of merchandise sold divided by the retail price of the merchandise sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 43. Use of the retail inventory method requires taking a physical count of inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 44. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 45. If a company uses a periodic inventory system, the gross profit method can be used to estimate inventory for monthly or quarterly statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM Multiple Choice 46. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the a. customer's ledger b. creditor's ledger c. inventory ledger d. purchase ledger ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 47. Which document authorizes the purchase of inventory from an approved vendor? a. purchase order b. petty cash voucher c. receiving report d. vendor's invoice ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:05 AM 48. The primary objectives of control over inventory are a. safeguarding the inventory from damage and maintaining constant observation of the inventory b. reporting inventory in the financial statements and taking a physical inventory c. maintaining constant observation of the inventory and reporting inventory in the financial statements d. safeguarding inventory from damage and reporting inventory in the financial statements ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:05 AM

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Chapter 7 - Inventories 49. Taking a physical count of inventory a. is not necessary when a periodic inventory system is used b. should be done near year-end c. has no internal control relevance d. is not necessary when a perpetual inventory system is used ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 50. Control of inventory should begin as soon as the inventory is ordered. Which of the following internal control steps is not done to meet this goal? a. check the invoice to the receiving report b. check the invoice to the purchase order c. check the invoice with the person who specifically purchased the item d. check the invoice for mathematical accuracy ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 51. All of the following are documents used for inventory control except a a. petty cash voucher b. vendor's invoice c. receiving report d. purchase order ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 53. Which of the following is not an example of safeguarding inventory? a. storing inventory in restricted areas b. physical devices such as two-way mirrors, cameras, and alarms c. matching receiving documents, purchase orders, and vendor’s invoice d. returning inventory that is defective or broken ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:10 AM 54. Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items? a. FIFO b. LIFO c. average d. specific identification ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 55. Ending inventory is made up of the oldest purchases when a company uses a. first-in, first-out b. last-in, first-out c. average cost d. retail method ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 56. When merchandise sold is assumed to be in the order in which the purchases were made, the company is using a. first-in, last-out b. last-in, first-out c. first-in, first-out d. average cost ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 57. The two most widely used methods for determining the cost of inventory are a. FIFO and LIFO b. FIFO and average cost c. LIFO and average cost d. gross profit and average cost ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 58. Cost flow is in the order in which costs were incurred when using a. average cost b. last-in, first-out c. first-in, first-out d. weighted average ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 59. Cost flow is in the reverse order in which costs were incurred when using a. weighted average b. last-in, first-out c. first-in, first-out d. average cost ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 60. The inventory method that assigns the most recent costs to cost of merchandise sold is a. FIFO b. LIFO c. weighted average d. specific identification ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 61. The inventory costing method that reports the most current prices in ending inventory is a. FIFO b. specific identification c. LIFO d. average cost ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 62. The inventory costing method that reports the earliest costs in ending inventory is a. FIFO b. LIFO c. weighted average d. specific identification ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 63. Which of the following companies would be more likely to use the specific identification inventory costing method? a. Gordon’s Jewelers b. Lowe’s c. Best Buy d. Walmart ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September: Sept. 1 4 10 17 30

Inventory Sale Purchase Sale Purchase

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

64. If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 ANSWER: RATIONALE:

a Ending Inventory Using FIFO = 20 units (at $25 from the September 10 purchase) + 10 units (at $30 from the September 30 purchase) = $500 + $300 = $800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: inventory data LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 65. Use the information for Addison, Inc. If Addison uses LIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 ANSWER: RATIONALE:

c Ending Inventory Using LIFO = 10 units (at $20 from the beginning inventory) + 10 units (at $25 from the September 10 purchase) + 10 units (at $30 from the September 30 purchase) = $200 + $250 + $300 = $750 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: inventory data LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:13 AM 66. When using a perpetual inventory system, the journal entry to record the cost of merchandise sold is a. debit Cost of Merchandise Sold; credit Sales b. debit Cost of Merchandise Sold; credit Merchandise Inventory c. debit Merchandise Inventory; credit Cost of Merchandise Sold d. No journal entry is made to record the cost of merchandise sold. ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:15 AM

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Chapter 7 - Inventories 67. Under the _____ inventory method, accounting records maintain a continuously updated inventory value. a. retail b. periodic c. physical d. perpetual ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 68. The inventory data for an item for November are: Nov. 1 Inventory 20 units at $19 4 Sale 10 units 10 Purchase 30 units at $20 17 Sale 20 units 30 Purchase 10 units at $21 Using a perpetual system, what is the cost of merchandise sold for November if the company uses LIFO? a. $610 b. $600 c. $590 d. $580 ANSWER: RATIONALE:

c Cost of Merchandise Sold for November Using LIFO = 10 units (at $19 from beginning inventory) + 20 units (at $20 from November 10 purchase) = $190 + $400 = $590

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:16 AM

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Chapter 7 - Inventories 69. The inventory data for an item for November are: Nov. 1 Inventory 20 units at $19 4 Sale 10 units 10 Purchase 30 units at $20 17 Sale 20 units 30 Purchase 10 units at $21 Using a perpetual system, what is the cost of merchandise sold for November if the company uses FIFO? a. $610 b. $600 c. $590 d. $580 ANSWER: RATIONALE:

d Cost of Merchandise Sold for November Using FIFO = 20 units (at $19 from beginning inventory) + 10 units (at $20 from November 10 purchase) = $380 + $200 = $580

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:19 AM

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Chapter 7 - Inventories Use the information below to answer the following questions. Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1. Date May 3 10 17 20 23 30

Blankets Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 24

70. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the LIFO inventory cost method. a. $136 b. $144 c. $180 d. $120 ANSWER: RATIONALE:

b Cost of Merchandise Sold for Sale of May 20 Using LIFO = 6 units (at $24 from May 17 purchase) = $144

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Boxwood Company LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 71. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO inventory cost method. a. $120 b. $180 c. $136 d. $144 ANSWER: RATIONALE:

c Cost of Merchandise Sold for Sale of May 20 Using FIFO = 2 units (at $20 from May 3 purchase) + 4 units (at $24 from May 17 purchase) = $40 + $96 = $136 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Boxwood Company LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 72. Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO inventory cost method. a. $364 b. $372 c. $324 d. $320 ANSWER: RATIONALE:

b Cost of Ending Inventory for Month of May Using FIFO = 3 units (at $24 from May 17 purchase) + 10 units (at $30 from May 30 purchase) = $72 + $300 = $372

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 73. Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost method. a. $108 b. $120 c. $72 d. $180 ANSWER: RATIONALE:

a Gross Profit for Sale of May 23 = Sales – Cost of Merchandise Sold = 3 units (at $60) – 3 units (at $24 from May 17 purchase) = $180 – $72 = $108

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 74. Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory cost method. a. $324 b. $372 c. $320 d. $364 ANSWER: RATIONALE:

d Ending Inventory for Month of May Using LIFO = 2 units (at $20 from May 3 purchase) + 1 unit (at $24 from May 17 purchase) + 10 units (at $30 from May 30 purchase) = $40 + $24 + $300 = $364

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 75. Assuming that the company uses the perpetual inventory system, determine the gross profit for the month of May using the LIFO cost method. a. $348 b. $452 c. $444 d. $356 ANSWER: RATIONALE:

c Gross Profit for Month of May = Sales – Cost of Merchandise Sold = 12 units (at $60) – [3 units (at $20 from May 3 purchase) + 9 units (at $24 from May 17 purchase)] = $720 – ($60 + $216) = $444 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Boxwood Company LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories Use the information below to answer the following questions. The following units of an inventory item were available for sale during the year: Beginning inventory 10 units at $55 First purchase 25 units at $60 Second purchase 30 units at $65 Third purchase 15 units at $70 The firm uses the periodic inventory system. During the year, 60 units of the item were sold. 76. The value of ending inventory using FIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 ANSWER: RATIONALE:

c Ending Inventory Using FIFO = 5 units (at $65 from second purchase) + 15 units (at $70 from third purchase) = $325 + $1,050 = $1,375 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic units LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 77. The value of ending inventory using LIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 ANSWER: RATIONALE:

d Ending Inventory Using LIFO = 10 units (at $55 from beginning inventory) + 10 units (at $60 from first purchase) = $550 + $600 = $1,150 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic units LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 78. The value of ending inventory rounded to the nearest dollar using average cost is a. $1,353 b. $1,263 c. $1,375 d. $1,150 ANSWER: RATIONALE:

b Average Cost per Unit = [($55 × 10 units) + ($60 × 25 units) + ($65 × 30 units) + ($70 × 15 units)]/(10 units + 25 units + 30 units + 15 units) = $63.125 Value of Ending Inventory Using Average Cost = 20 units × $63.125 = $1,26 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic units LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:42 AM

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10 units at $30 25 units at $32 30 units at $34 10 units at $35

79. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the LIFO method? a. $655 b. $620 c. $690 d. $659 ANSWER: RATIONALE:

b Ending Inventory Using LIFO = 10 units (at $30 from beginning inventory) + 10 units (at $32 from first purchase) = $300 + $320 = $620 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic2 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 80. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the FIFO method? a. $655 b. $620 c. $690 d. $659 ANSWER: RATIONALE:

c Ending Inventory Using FIFO = 10 units (at $34 from second purchase) + 10 units (at $35 from third purchase) = $340 + $350 = $690 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic2 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 81. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year rounded to the nearest dollar according to the average cost method? a. $655 b. $620 c. $690 d. $659 ANSWER: RATIONALE:

d Average Cost per Unit = [($30 × 10 units) + ($32 × 25 units) + ($34 × 30 units) + ($35 × 10 units)]/(10 units + 25 units + 30 units + 10 units) = $32.933 Value of Ending Inventory Using Average Cost = 20 units × $32.933 = $659 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic2 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:48 AM

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5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year.

82. What is the amount of cost of merchandise sold for the year according to the average cost method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: RATIONALE:

a Average Cost per Unit = [($61 × 5 units) + ($63 × 15 units) + ($74 × 10 units) + ($77 × 10 units)]/(5 units + 15 units + 10 units + 10 units) = $69 Cost of Merchandise Sold for Year Using Average Cost Method = $69 × 20 units = $1,380

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic3 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 83. What is the amount of cost of merchandise sold for the year according to the FIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: RATIONALE:

d Cost of Merchandise Sold for Year Using FIFO = 5 units (at $61 from beginning inventory) + 15 units (at $63 from first purchase) = $305 + $945 = $1,250 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic3 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 84. What is the amount of cost of merchandise sold for the year according to the LIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: RATIONALE:

c Cost of Merchandise Sold for Year Using LIFO = 10 units (at $74 from second purchase) + 10 units (at $77 from third purchase) = $740 + $770 = $1,510 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic3 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 7 - Inventories 85. Under a periodic inventory system a. accounting records continuously disclose the amount of inventory b. a separate account for each type of merchandise is maintained in a subsidiary ledger c. a physical inventory is taken at the end of the period d. Merchandise Inventory is debited when goods are returned to vendors ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:53 AM

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Chapter 7 - Inventories Use the information below to answer the following questions. The following lots of a particular commodity were available for sale during the year: Beginning inventory 10 units at $60 First purchase 25 units at $65 Second purchase 30 units at $68 Third purchase 15 units at $75 The firm uses the periodic system, and there are 25 units of the commodity on hand at the end of the year. 86. What is the amount of inventory at the end of the year using the FIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,585 ANSWER: RATIONALE:

c Ending Inventory Using FIFO = 10 units (at $68 from second purchase) + 15 units (at $75 from third purchase) = $680 + $1,125 = $1,805 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic4 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:54 AM

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Chapter 7 - Inventories 87. What is the amount of inventory at the end of the year using the LIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,815 ANSWER: RATIONALE:

b Ending Inventory Using LIFO = 10 units (at $60 from beginning inventory) + 15 units (at $65 from first purchase) = $600 + $975 = $1,575 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic4 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:56 AM

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Chapter 7 - Inventories 88. What is the amount of inventory at the end of the year rounded to the nearest dollar using the average cost method? a. $1,685 b. $1,575 c. $1,805 d. $3,705 ANSWER: RATIONALE:

a Average Cost per Unit = [($60 × 10 units) + ($65 × 25 units) + ($68 × 30 units) + ($75 × 15 units)]/(10 units + 25 units + 30 units + 15 units) = $67.375 Ending Inventory Using Average Cost Method = $67.38 × 25 units = $1,685

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Periodic4 LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 8:58 AM 89. If Beginning Inventory (BI) + Purchases (P) – Ending Inventory (EI) = Cost of Merchandise Sold (COMS), an equivalent equation can be written as a. BI + P = COMS – EI b. BI – P = COMS + EI c. BI + P = COMS + EI d. EI + P = COMS – BI ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 7 - Inventories 90. During a period of consistently rising prices, the method of inventory that will result in reporting the greatest cost of merchandise sold is a. FIFO b. LIFO c. average cost d. weighted average ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 91. During times of rising prices, which of the following is not an accurate statement? a. Average costing will yield results that are between those of FIFO and LIFO. b. LIFO will result in a higher cost of merchandise sold than FIFO. c. FIFO will result in a higher net income than LIFO. d. LIFO will result in higher income taxes than FIFO. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 92. If the revenues are correctly reported and the gross profit of a company is understated, what is the effect on owner’s equity? a. understated b. overstated c. correctly stated d. None of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 9:00 AM 93. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is a. periodic b. LIFO c. FIFO d. average cost ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 94. If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income? a. average cost b. LIFO c. FIFO d. weighted average ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 95. W hich of the following will be the same amount regardless of the cost flow assumption adopted? a. n umber of items ordered b. g ross profit c. c ost of goods sold d. e nding merchandise inventory ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 96. FIFO reports higher gross profit and net income than the LIFO method when a. p rices are increasing b. p rices are decreasing c. p rices remain stable d. p rices are reduced by 50% ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 97. During a period of falling prices, which of the following inventory methods generally results in the lowest balance sheet amount for inventory? a. average cost method b. LIFO method c. FIFO method d. cannot tell without more information ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 98. Damaged merchandise that can be sold only at prices below cost should be valued at a. net realizable value b. LIFO c. FIFO d. average cost ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 99. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the a. consignee b. retailer c. manufacturer d. shipper ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 100. Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity? a. Net income is overstated, assets are overstated, and owner's equity is understated. b. Net income is overstated, assets are overstated, and owner's equity is overstated. c. Net income is understated, assets are understated, and owner's equity is understated. d. Net income is understated, assets are understated, and owner's equity is overstated. ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 102. Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error? a. Owner's equity is overstated. b. Cost of merchandise sold is overstated. c. Gross profit is understated. d. Net income is understated. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 10:35 AM 103. If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is a. $15 b. $60 c. $75 d. $135 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 104. Kristin’s Boutique has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory? a. Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristin’s Boutique as of December 31. b. Kristin's has in its warehouse merchandise on consignment from Abby Co. c. Kristin's has sent merchandise to various retailers on a consignment basis. d. Kristin's has merchandise on hand that has been returned by customers because of wrong size. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:13 PM 105. During the taking of its physical inventory on December 31, Barry’s Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be a. assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000 b. assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement c. assets, retained earnings, and net income all overstated by $70,000 d. assets and retained earnings overstated by $70,000 and net income understated by $70,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:10 AM

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Chapter 7 - Inventories 106. If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line? a. There will be no change to net income. b. Net income will be overstated. c. Net income will be understated. d. Only gross profit will be affected. ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 108. Determine the total value of the merchandise using net realizable value. Item Doll Horse a. $35 b. $80 c. $115 d. $25

Quantity 10 5

Selling Price $7 9

Commission $2 3

ANSWER: RATIONALE:

b Net Realizable Value = Estimated Selling Price – Direct Costs of Disposal Net Realizable Value = [(10 units × $7) + (5 units × $9)] – [(10 units × $2) + (5 units × $3)] = [($70 + $45) – ($20 + $15)] = $80 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 109. If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. Item Product C Product D a. $6,960 b. $7,700 c. $6,540 d. $7,280

Inventory Quantity 420 370

Unit Cost Price $6 12

Unit Market Price $ 5 14

ANSWER: RATIONALE:

a Total Cost of Inventory = Number of Units × Unit Cost Price = (420 units × $6) + (370 units × $12) = $6,960 Total Market Value of Inventory = Number of Units × Unit Market Price = (420 units × $5) + (370 units × $14) = $7,280 The value of the inventory using the lower-of-cost-or-market method as a whole is $6,960. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:19 PM

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Chapter 7 - Inventories 110. Too much inventory on hand a. ties up funds that could be used to improve operations b. increases the cost to safeguard the assets c. increases the losses due to price declines d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:20 PM 111. Which of the following is used to analyze the efficiency and effectiveness of inventory management? a. inventory turnover only b. days’ sales in inventory only c. both inventory turnover and days’ sales in inventory d. neither inventory turnover nor days’ sales in inventory ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:21 PM

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Chapter 7 - Inventories 112. Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period? a. inventory turnover b. fixed asset turnover c. retail method of inventory costing d. gross profit method of inventory costing ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 113. Which of the following measures the length of time it takes to acquire, sell, and replace inventory? a. inventory turnover b. days’ sales in inventory c. retail method of inventory costing d. gross profit method of inventory costing ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:22 PM

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Chapter 7 - Inventories 114. E xcess inventory results in all of the following except a. tied-up funds that could be used to improve operations b. l ost sales c. i ncreased storage expense d. i ncreased risk of loss due to damage ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 115. The days' sales in inventory measures the a. length of time it takes to acquire, sell, and replace the inventory b. length of time it takes to acquire and receive payment for the inventory c. number of days inventory is on hand prior to sale d. number of days inventory takes to arrive after ordering ANSWER: POINTS: DIFFICULTY:

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Chapter 7 - Inventories 116. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max’s inventory turnover for the year. a. 8.7 b. 7.8 c. 8.3 d. 44.0 ANSWER: RATIONALE:

c Inventory Turnover = Cost of Merchandise Sold/Average Inventory = $56,900 ÷ [($6,540 + $7,250) ÷ 2] = $56,900 ÷ $6,895 = 8.3 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 117. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max’s days' sales in inventory is closest to a. 42 b. 46 c. 8 d. 44 ANSWER: RATIONALE:

d Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Merchandise Sold = [($6,540 + $7,250) ÷ 2] ÷ [$56,900 ÷ 365] = $6,895 ÷ 156 = 44 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:25 PM

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Chapter 7 - Inventories 118. The method of estimating inventory that uses records of the selling prices of the merchandise is called the a. retail method b. gross profit method c. inventory turnover method d. average cost method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:27 PM

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Chapter 7 - Inventories 119. On the basis of the following data, what is the estimated cost of the merchandise inventory on May 31 using the retail method?

May 1 May 1–31 May 1–31

Merchandise inventory Purchases Sales

Cost $125,000 235,000

Retail $166,667 313,333 230,000

a. $250,000 b. $360,000 c. $172,500 d. $187,500 ANSWER: RATIONALE:

d Merchandise Available for Sale = Merchandise Inventory, May 1 + Purchases Merchandise Available for Sale at Cost = $125,000 + $235,000 = $360,000 Merchandise Available for Sale at Retail = $166,667 + $313,333 = $480,000 Ratio of Cost to Retail Price = $360,000 ÷ $480,000 = 75% Merchandise Inventory, May 31, at Retail = Merchandise Available for Sale at Retail – Sales for May = $480,000 – $230,000 = $250,000 Merchandise Inventory, May 31, at Cost = Merchandise Inventory, May 31, at Retail × Ratio of Cost to Retail Price = $250,000 × 75% = $187,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:27 PM

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Chapter 7 - Inventories 120. If the estimated rate of gross profit is 30%, what is the estimated cost of the merchandise inventory on September 30, based on the following data? Sept. 1 Sept. 1–30 Sept. 1–30

Merchandise inventory (at cost) Purchases, net (at cost) Sales

$125,000 300,000 150,000

a. $320,000 b. $192,500 c. $275,000 d. $105,000 ANSWER: RATIONALE:

a Estimated Cost of Merchandise Sold = Sales for September – Estimated Gross Profit = $150,000 – ($150,000 × 30%) = $150,000 – $45,000 = $105,000 Estimated Merchandise Inventory, September 30 = Merchandise Available for Sale – Estimated Cost of Merchandise Sold = ($125,000 + $300,000) – $105,000 = $320,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:13 AM

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Chapter 7 - Inventories 121. All of the following are reasons to use an estimated method of costing inventory except a. perpetual inventory records are not maintained b. purchase records are not maintained c. a disaster has destroyed the inventory records and the inventory d. interim financial statements are required but physical inventory is only taken at the end of the financial accounting period ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:31 PM

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Chapter 7 - Inventories 122. Garrison Company uses the retail method of inventory costing. It started the year with an inventory that had a retail cost of $45,000. During the year, Garrison purchased an inventory with a retail sales value of $300,000. After performing a physical inventory, Garrison calculated the inventory at retail to be $80,000. The markup is 100% of cost. Determine the ending inventory at its estimated cost. a. $160,000 b. $80,000 c. $40,000 d. $45,000 ANSWER: RATIONALE:

c As the markup is 100% of cost, the ratio of cost to retail is 50%. Ending Inventory at Cost = Ending Inventory at Retail × Ratio of Cost to Retail = $80,000 × 50% = $40,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 123. A company will most likely use an estimated method of determining inventory when a. the company decides not to do a physical inventory b. a natural disaster has destroyed most of the inventory c. the company has not kept up with its inventory records d. the company is preparing annual financial statements ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 7 - Inventories 124. Stevens Company started the year with an inventory cost of $145,000. During the month of January, Stevens purchased inventory that cost $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is a. $58,000 b. $91,000 c. $107,000 d. $69,300 ANSWER: RATIONALE:

c Estimated Cost of Merchandise Sold = Sales for January – Estimated Gross Profit = $140,000 – ($140,000 × 35%) = $140,000 – $49,000 = $91,000 Estimated Merchandise Inventory, January 31 = Merchandise Available for Sale – Estimated Cost of Merchandise Sold = ($145,000 + $53,000) – $91,000 = $107,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories Matching Match each description to the appropriate document used for inventory control (a–c). a. Receiving report b. Vendor’s invoice c. Purchase order DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:34 PM 125. Last document in the chain, use to compare all three for accuracy ANSWER: b POINTS: 1 126. Authorizes the purchase of inventory from an approved vendor ANSWER: c POINTS: 1 127. Establishes an initial record of the receipt of inventory ANSWER: a POINTS: 1

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Chapter 7 - Inventories Match each description to the appropriate cost flow assumption (a–d). a. Weighted average b. First-in, first-out (FIFO) c. Last-in, first-out (LIFO) d. Specific identification DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 128. The cost of the units sold and in ending inventory is a weighted average of the purchase costs. ANSWER: a POINTS: 1 129. Cost flow is assumed to be in the reverse order of costs incurred. ANSWER: c POINTS: 1 130. Cost flow matches the unit sold to the unit purchased. ANSWER: d POINTS: 1 131. Cost flow is in the order in which the costs were incurred. ANSWER: b POINTS: 1

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Chapter 7 - Inventories Match each description to the appropriate inventory system (a or b). a. Perpetual b. Periodic DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 132. This system can be costly and time consuming if not computerized. ANSWER: a POINTS: 1 133. Average cost is rarely used with this system. ANSWER: a POINTS: 1 134. Under this system, only revenue is recorded when sales are made. ANSWER: b POINTS: 1 135. When using this system, a physical inventory is necessary to determine cost of merchandise sold. ANSWER: b POINTS: 1

Match each description to the appropriate cost flow assumption (a–c). a. FIFO b. LIFO c. Weighted average DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Moderate Bloom's: Remembering Matching False ACCT.WARD.18.07-02 - 07-02 ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCT.WARD.18.07-05 - 07-05

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Chapter 7 - Inventories ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 136. Produces the same cost of merchandise sold under both the periodic and the perpetual inventory systems ANSWER: a POINTS: 1 137. Rarely used with a perpetual inventory system ANSWER: c POINTS: 1 138. Produces results that are similar to the specific identification method ANSWER: a POINTS: 1 139. Widely used for tax purposes ANSWER: b POINTS: 1 140. Never results in either the highest or lowest possible net income ANSWER: c POINTS: 1 141. Produces the highest gross profit when costs are decreasing ANSWER: b POINTS: 1 142. Produces the highest ending inventory when costs are increasing ANSWER: a POINTS: 1 143. Assigns the same value to all inventory units ANSWER: c POINTS: 1 144. Prohibited under International Financial Reporting Standards (IFRS) ANSWER: b POINTS: 1 145. Does not follow the physical flow of goods in most cases ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 7 - Inventories 146. Cost of the latest purchases are assigned to ending inventory ANSWER: a POINTS: 1 Match each situation to its impact (a–c) on the current year's net income. a. Net income for the current year will be overstated. b. Net income for the current year will be understated. c. There will be no error effect on net income. DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 147. Purchased merchandise was shipped FOB shipping point on the last day of the year. The cost of the merchandise was not included in ending inventory. ANSWER: b POINTS: 1 148. Merchandise was purchased FOB destination on the last day of the year. The cost of the merchandise purchased was not included in ending inventory. ANSWER: c POINTS: 1 149. Merchandise held on consignment was included in the count of ending inventory. ANSWER: a POINTS: 1 150. A consignor included merchandise in the hands of the consignee in ending inventory. ANSWER: c POINTS: 1 151. Beginning inventory was understated. ANSWER: a POINTS: 1

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Chapter 7 - Inventories 152. Merchandise that was sold and shipped FOB destination on the last day of the year was not included in the seller’s ending inventory. ANSWER: b POINTS: 1 153. Merchandise that was sold and shipped FOB shipping point on the last day of the year was not included in the seller’s ending inventory. ANSWER: c POINTS: 1 154. The beginning inventory was recorded as $10,000, when actual inventory on hand was $12,000. ANSWER: a POINTS: 1 Subjective Short Answer 155. Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you were running a clothing store, name three specific controls you would implement to guard inventory from theft. ANSWER:

Answers will vary but may include ink tags, alarm tags, bells that signal a customer is entering the area to try on clothing, chains that hook through the sleeves of garments and are locked onto clothing racks, scanners to screen customers as they leave the store for unpaid merchandise, and greeters at the store's entrance to keep customers from bringing in bags that can be used to shoplift merchandise. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 156. List three different security measures taken to safeguard inventory. ANSWER:

Answers will vary and may include: - Storing inventory in areas that are restricted to only authorized employees. - Using physical devices such as two-way mirrors, cameras, and security guards. - Locking high-priced inventory in cabinets. - Placing sensors at each of the exits that are set off by alarm tags. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:15 AM 157. List the internal control objectives illustrated by the following: (a) (b) (c)

Keeping the inventory storeroom locked Counting the inventory at the end of the accounting period and comparing it with the inventory ledger clerk's records Using subsidiary ledgers and a perpetual inventory system

ANSWER:

(a) (b) (c)

Safeguarding the inventory from damage or theft Safeguarding the inventory from damage or theft and reporting inventory in the financial statements Keeping inventory at proper levels and reporting inventory in the financial statements

POINTS: DIFFICULTY:

1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:38 PM

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Chapter 7 - Inventories 158. Three identical units of merchandise were purchased during March, as shown:

Mar. 3 10 19 Total

Steele Plate Purchase Purchase Purchase

Units 1 1 1 3

Cost $ 830 840 880 $2,550

Assume that one unit is sold on March 23 for $1,125. Determine the gross profit for March and ending inventory on March 31 using (a) FIFO, (b) LIFO, and (c) average cost methods. Gross Profit

ANSWER:

Ending Inventory

First-in, first-out (FIFO) $295 ($1,125 – $830)

$1,720 ($840 + $880)

Last-in, first-out (LIFO) $245 ($1,125 – $880)

$1,670 ($830 + $840)

Average cost

$2,550/3 = $850 avg. cost $1,700 ($850 × 2) $275 ($1,125 – $850)

POINTS: DIFFICULTY:

1 Bloom's: Applying Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:40 PM

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Chapter 7 - Inventories 159. Three identical units of merchandise were purchased during May, as follows:

May 3 10 19 Total

Magnesium XP Units Purchase 1 Purchase 1 Purchase 1 3

Cost $130 136 142 $408

Assume that two units are sold on May 23 for $313 total. Determine the gross profit for May and ending inventory on May 31 using (a) FIFO, (b) LIFO, and (c) average cost methods.

First-in, first-out (FIFO)

Gross Profit $47 [$313 – ($130 + $136)]

Ending Inventory $142

Last-in, first-out (LIFO)

$35 [$313 – ($142 + $136)]

$130

Average cost

$408/3 = $136 average cost $41 [$313 – ($136 × 2 units)]

$136

ANSWER:

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 160. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the LIFO method. ANSWER: Sales Cost of merchandise sold Gross profit Ending inventory ($5 + $13)

October 31 $28 15 $13 $18

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:43 PM

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Chapter 7 - Inventories 161. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $ 5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the average cost method.

ANSWER: Sales Cost of merchandise sold ($33/3) Gross profit Ending inventory ($11 × 2)

October 31 $28 11 $17 $22

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 162. Assume that three identical units of merchandise are purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the FIFO method.

ANSWER: Sales Cost of merchandise sold Gross profit Ending inventory ($13 + $15)

October 31 $28 5 $23 $28

POINTS: DIFFICULTY:

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Chapter 7 - Inventories 163. Three identical units of merchandise were purchased during July, as follows: Date July 3 10 24

Product Basic H Purchase Purchase Purchase

Total

Units 1 1 1 3

Average cost per unit

Cost $ 35 36 37 $108 $36

Assume one unit sells on July 28 for $45. Determine the gross profit, cost of merchandise sold, and ending inventory on July 31 using the (a) first-in, first-out, (b) last-in, first-out, and (c) average cost flow methods. Cost of Merchandise Sold Ending Inventory $35 $108 – $35 = $73

a) First-in, first-out

Gross Profit $45 – $35 = $10

b) Last-in, first-out

$45 – $37 = $8

$37

$108 – $37 = $71

c) Average

$45 – $36 = $9

$36

$108 – $36 = $72

ANSWER:

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 12:47 PM

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Chapter 7 - Inventories 164. Describe three inventory cost flow assumptions and how they impact the financial statements. ANSWER:

1. Cost flow is in the order in which costs were incurred or first-in, first-out (FIFO). The first units purchased are assumed sold, so the oldest costs flow to the income statement and the cost of the newest purchases are on the balance sheet. 2. Cost flow is in the reverse order in which costs were incurred or last-in, first-out (LIFO). The last units purchased are assumed sold, so the newest costs flow to the income statement and the cost of the oldest purchases are on the balance sheet.

3. Cost flow is an average of the costs. Under the average cost method, all units are assigned the same average cost for the period. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

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Chapter 7 - Inventories 165. The following data regarding purchases and sales of a commodity were taken from the related perpetual inventory account: June 1 6 8 16 20 23 30

Balance Sale Purchase Sale Purchase Sale Purchase

25 units at $60 20 units 20 units at $61 10 units 20 units at $62 25 units 15 units at $63

Calculate the cost of the ending inventory at June 30, using (a) the first-in, first-out (FIFO) method and (b) the last-in, first-out (LIFO) method. Identify the quantity, unit price, and total cost of each lot in the inventory. ANSWER: (a)

(b)

June 20 30

June 1 8 30

10 units at $62 15 units at $63 Total

$ 620 945 $1,565

5 units at $60 5 units at $61 15 units at $63 Total

$ 300 305 945 $1,550

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 166. Beginning inventory, purchases, and sales data for hammers are as follows: Mar. 3 11 14 21 25

Inventory Purchase Sale Purchase Sale

12 units at $15 13 units at $17 18 units 9 units at $20 10 units

Assuming the business maintains a perpetual inventory system, complete the inventory cards and calculate the cost Copyright Cengage Learning. Powered by Cognero.

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Chapter 7 - Inventories of merchandise sold and ending inventory under the following assumptions: (a) First-in, first-out Cost of Merchandise Sold

Purchases

Date Qty. Mar. 3 11 14 21 25 Balances

Unit Cost

Total Cost

Qty.

Unit Cost

Inventory

Total Cost

Unit Cost

Qty.

Total Cost

(b) Last-in, first-out Cost of Merchandise Sold

Purchases

Date Qty. Mar. 3 11 14 21 25 Balances ANSWER:

Unit Cost

Total Cost

Qty.

Unit Cost

Inventory

Total Cost

Unit Cost

Qty.

Total Cost

a. First-in, first-out

Date Mar. 3 11

Purchases

Cost of Merchandise Sold

Unit Total Qty. Cost Cost

Unit Cost

$17

$221 12 6

14 21 25 Balances Copyright Cengage Learning. Powered by Cognero.

Qty.

$20

$180 7 3

Inventory

Total Unit Total Cost Qty. Cost Cost 12 $15 $180 12 $15 $180 13 $17 221 $15 $180 7 $17 $119 $17 102 7 $17 $119 9 $20 180 $17 $119 6 $20 $120 $20 60 $461 $120 Page 92

Chapter 7 - Inventories b. Last-in, first-out Purchases

Date Mar. 3 11 14 21 25

Cost of Merchandise Sold

Inventory

Unit Total Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost 12 $15 $180 12 $15 $180 13 $17 $221 13 $17 221 13 $17 $221 7 $15 $105 5 $15 75 7 $15 $105 9 $20 $180 9 $20 180 9 $20 $180 6 $15 $90 1 $15 15

Balances

$491

$90

POINTS: DIFFICULTY:

Page 93

Chapter 7 - Inventories 167. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

$15

$20

Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. ANSWER:

a) Cost of merchandise sold: 7 units @ $15 = $105 1 unit @ $20 = 20 8 units $125

b) Inventory, September 30: 9 units @ $20 = $180 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 1:07 PM

Page 94

Chapter 7 - Inventories 168. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to FIFO? ANSWER: POINTS: DIFFICULTY:

$805 × 240 units = $193,200 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 95

Chapter 7 - Inventories 169. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to LIFO? ANSWER: POINTS: DIFFICULTY:

($755 × 30 units) + ($785 × 200 units) + ($805 × 10 units) = $187,700 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 96

Chapter 7 - Inventories 170. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

$10

$15

Assuming a perpetual inventory system and the last-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. ANSWER:

(a) Cost of merchandise sold: 8 units @ $15 = $120

(b) Inventory on September 30: 7 units @ $10 = $ 70 2 units @ $15 = 30 9 units $100 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 1:09 PM

Page 97

Chapter 7 - Inventories 171. Using a LIFO perpetual cost flow, calculate the value of the ending inventory and the cost of merchandise sold for the month of November of Beamer Company using the data below. Nov. 1 4 11 12 22 23

Purchase Sale Purchase Sale Purchase Sale

600 units $80 each 200 units 350 units $82 each 275 units 175 units $84 each 155 units

Calculate the following: (a) Inventory valuation at the end of November (b) Cost of merchandise sold for November ANSWER:

(a) Inventory valuation: 400 @ $80 = $32,000 75 @ $82 = 6,150 20 @ $84 = 1,680 $39,830 (b) Cost of merchandise sold:

200 @ $80 = $16,000 275 @ $82 = 22,550 155 @ $84 = 13,020 $51,570 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 1:10 PM 172. Complete the following table using the perpetual FIFO method of inventory flow. Inventory Valuation—Perpetual FIFO Purchased Unit Date Units Cost July 2

600

Units Sold

Unit Cost

Inventory Inventory Unit Units Dollar Balance Costs Balance

$12

Bal. Copyright Cengage Learning. Powered by Cognero.

Page 98

Chapter 7 - Inventories July 5

200

$13

Bal. July 7

300

Bal. July 10

325

$14

Bal. July 12

300 150

Bal. July 18

250

$13

Bal. July 22

50 205

Bal. July 25

120 180

Bal. July 28

330

$15

Bal. July 31

70 5

Ending Balance

FIFO INVENTORY VALUATION:

ANSWER: Inventory Valuation—Perpetual FIFO

Date July 2 Bal. July 5 Bal. Copyright Cengage Learning. Powered by Cognero.

Purch. Units 600

Unit Cost $12

200

$13

Units Sold

Unit Cost

Inventory Units Unit Balance Costs 600 $12 600 200

$12 $13

Inventory Dollar Balance $ 7,200 $ 7,200 $ 7,200 2,600 $ 9,800 Page 99

Chapter 7 - Inventories July 7 Bal. July 10

300

325

$14

Bal. July 12 Bal. July 18

300 150 250

Bal. July 25

Bal. July 31 End Bal.

330

$12 $13

$13

Bal. July 22

Bal. July 28

$12

300 200

$12 $13

300 200 325

$12 $13 $14

50 325

$13 $14

50 325 250

$13 $14 $13

50 205

$13 $14

120 250

$14 $13

120 180

$14 $13

$13

$15

70 330 70 5

$13 $15

$13 $15 $15

$ 3,600 2,600 $ 6,200 $ 3,600 2,600 4,550 $10,750 $ 650 4,550 $ 5,200 $ 650 4,550 3,250 $ 8,450 $ 1,680 3,250 $ 4,930 $ 910 $ 910 $ 910 4,950 $ 5,860 $ 4,875

325

FIFO INVENTORY VALUATION:

$4,875

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:17 AM 173. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Copyright Cengage Learning. Powered by Cognero.

Page 100

Chapter 7 - Inventories Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units 13 units 18 units 9 units 10 units

@ @

$45 $47

$60

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using FIFO.

Purchases

Date Qty.

Unit Cost

Total Cost

Cost of Merchandise Sold

Inventory

Unit Cost

Qty.

Total Cost

Total cost of merchandise sold

Qty.

Total Cost

Ending inventory value

ANSWER:

Date Apr. 3 11

Cost of Purchases Merchandise Sold Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost 13

$47

$60

14 21 25

Inventory

Unit Total Qty. Cost Cost 12 $45 $540 $611 12 $45 $540 13 $47 611 12 $45 $540 7 $47 $329 6 $47 282 $540 7 $47 $329 9 $60 540 7 $47 $329 6 $60 $360 3 $60 180 Total cost of Ending inventory inventory sold $1,331 value $360

Page 101

Chapter 7 - Inventories POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:19 AM 174. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units 13 units 18 units 9 units 10 units

@ @

$45 $47

$60

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using LIFO.

Purchases

Date Qty.

Unit Cost

Total Cost

Cost of Merchandise Sold

Inventory

Unit Cost

Qty.

Total Cost

Total cost of merchandise sold

Qty.

Total Cost

Ending inventory value

ANSWER: Cost of Merchandise Sold Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Apr. 3 13 $47 $611 11 Purchases

Inventory Unit Total Qty. Cost Cost 12 $45 $540 12 $45 $540 13 $47 611 Page 102

Chapter 7 - Inventories 13 5

14 21

$60

$47 $45

$611 225

$540

$45

$315

7 9 6

$45 $60 $45

$315 540 $270

9 $60 $540 1 $45 45 Total cost of Ending merchandise inventory sold $1,421 value

$270

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:20 AM 175. Beginning inventory, purchases, and sales data for widgets are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

$25

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using FIFO. Cost of Merchandise Sold

Purchases Unit Date Qty. Cost

Total Cost

Qty.

Unit Cost

Total cost of merchandise sold Copyright Cengage Learning. Powered by Cognero.

Total Cost

Inventory

Qty.

Unit Cost

Total Cost

Ending inventory value Page 103

Chapter 7 - Inventories ANSWER: Cost of Inventory Merchandise Sold Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Apr. 3 15 $30 $450 12 $27 $324 15 $30 $450 11 12 27 324 15 $30 $450 9 $27 $243 14 3 $27 81 7 $25 $175 9 $27 $243 21 7 25 175 9 $27 $243 6 $25 $150 25 1 $25 25 Total cost of Ending merchandise inventory sold $799 value $150 Purchases

POINTS: DIFFICULTY:

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

$25

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using LIFO.

Purchases

Cost of Merchandise Sold

Inventory Page 104

Chapter 7 - Inventories

Date Qty.

Unit Cost

Total Cost

Unit Cost

Qty.

Total Cost

Total cost of merchandise sold

Qty.

Unit Cost

Total Cost

Ending inventory value

ANSWER: Cost of Inventory Merchandise Sold Unit Total Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost 15 $30 $450 12 $27 $324 15 $30 $450 12 $27 324 12 $27 $324 9 $30 $270 6 $30 180 7 $25 $175 9 $30 $270 7 $25 175 7 $25 $175 6 $30 $180 3 $30 90 Total cost of Ending merchandise inventory sold $769 value $180 Purchases

Date Apr. 3 11 14 21 25

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 1:17 PM 177. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1 Purchased 500 units @ $25.00 each. 4 Purchased 300 units @ $24.00 each. 6 Sold 400 units @ $38.00 each. Copyright Cengage Learning. Powered by Cognero.

Page 105

Chapter 7 - Inventories 8 Purchased 700 units @ $23.00 each. 13 Sold 450 units @ $37.50 each. 20 Purchased 250 units @ $25.25 each. 22 Sold 275 units @ $36.00 each. 27 Sold 300 units @ $37.00 each. 28 Purchased 550 units @ $26.00 each. 30 Sold 100 units @ $39.00 each. Calculate total sales, cost of merchandise sold, gross profit, and ending inventory using each of the following inventory methods: 1. FIFO perpetual 2. FIFO periodic 3. LIFO perpetual 4. LIFO periodic 5. Average cost periodic (round average to nearest cent) ANSWER:

Total sales (not dependent on inventory method): May 6 400 @ $38.00 = $15,200.00 13 450 @ $37.50 = 16,875.00 22 275 @ $36.00 = 9,900.00 27 300 @ $37.00 = 11,100.00 30 100 @ $39.00 = 3,900.00 Total sales 1,525 units $56,975.00 Total merchandise available for sale: May 1 500 @ $25.00 = $12,500.00 4 300 @ $24.00 = 7,200.00 8 700 @ $23.00 = 16,100.00 20 250 @ $25.25 = 6,312.50 28 550 @ $26.00 = 14,300.00 Total 2,300 units $56,412.50 1. and 2. FIFO perpetual, FIFO periodic: There is no difference between these methods since FIFO is always first-in, firstout. Ending inventory: Total Units – Units Sold = Ending Inventory 2,300 – 1,525 = 775 units 225 @ $25.25 = 550 @ $26.00 = Ending inventory

$ 5,681.25 14,300.00 $19,981.25

Cost of merchandise sold: Total goods available Less ending inventory

$56,412.50 19,981.25

Page 106

Chapter 7 - Inventories Cost of merchandise sold Gross profit: Total sales Less cost of merchandise sold Gross profit

$36,431.25

$56,975.00 36,431.25 $20,543.75

3. LIFO perpetual: Inventory Valuation

Date May 1 May 4 Bal. May 6 Bal. May 8 Bal.

May 13 Bal.

May 20 Bal. May 22 May 27 Bal. May 28 May 30 Bal.

Purchased Units/ Units Inventory Balance Price Sold Cost Balance 500 25.00 12,500.00 300 24.00 7,200.00 19,700.00 300 24.00 (7,200.00) 100 25.00 (2,500.00) 400 25.00 10,000.00 700 23.00 16,100.00 400 25.00 10,000.00 700 23.00 16,100.00 26,100.00 450 23.00 (10,350.00) 400 25.00 10,000.00 250 23.00 5,750.00 15,750.00 250 25.25 6,312.50 22,062.50 250 25.25 (6,312.50) 25 23.00 (575.00) 225 23.00 (5,175.00) 75 25.00 (1,875.00) 325 25.00 8,125.00 550 26.00 14,300.00 100 26.00 (2,600.00) 325 25.00 8,125.00 450 26.00 11,700.00 Ending inventory

Cost of merchandise sold: Total goods available Less ending inventory Copyright Cengage Learning. Powered by Cognero.

19,825.00

$56,412.50 19,825.00 Page 107

Chapter 7 - Inventories Cost of merchandise sold

$36,587.50

Gross profit: Total sales Less COMS Gross profit

$56,975.00 36,587.50 $20,387.50

4. LIFO periodic: Ending inventory: 500 @ $25.00 = 275 @ $24.00 = Ending inventory

$12,500.00 6,600.00 $19,100.00

Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold

$56,412.50 19,100.00 $37,312.50

Gross profit: Total sales Less COMS Gross profit

$56,975.00 37,312.50 $19,662.50

5. Average cost periodic: Average cost: $56,412.50/2,300 units = $24.53 Ending inventory: 775 units × $24.53 = $19,010.75 Cost of merchandise sold: $56,412.50 – $19,010.75 = $37,401.75 Gross profit: $56,975.00 – $37,401.75 = $19,573.25

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCT.WARD.18.07-05 - 07-05

Page 108

Chapter 7 - Inventories ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:25 AM 178. The units of an item available for sale during the year were as follows: January 10 February 27 July 11 November 13

Inventory Purchase Purchase Purchase

27 units @ $90 54 units @ $98 63 units @ $106 36 units @ $115

There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the average cost method. Show your work. ANSWER:

(a) (b) (c)

$5,624 (36 units at $115 + 14 units at $106 = $4,140; $4,140 + $1,484) $4,684 (27 units at $90 + 23 units at $98 = $2,430; $2,430 + $2,254) $5,150 ($18,540*/180 units = $103; 50 units at $103) *Cost of merchandise available for sale: 27 units at $90 54 units at $98 63 units at $106 36 units at $115 180 units (at average cost of $103)

$ 2,430 5,292 6,678 4,140 $18,540

POINTS: DIFFICULTY:

Page 109

Chapter 7 - Inventories 179. The units of an item available for sale during the year were as follows: January 11 February 27 November 21

Inventory Purchase Purchase

60 units @ $145 90 units @ $150 75 units @ $154

There are 48 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the average cost method. Show your work. ANSWER:

(a) (b) (c)

$7,392 (48 units × $154) $6,960 (48 units × $145) $7,200 ($33,750*/225 units = $150; 48 units × $150) *Cost of merchandise available for sale: 6 0 units at $145 90 units at $150 75 units at $154 225 units (at average cost of $150)

$ 8,700 13,500 11,550 $33,750

POINTS: DIFFICULTY:

Page 110

Chapter 7 - Inventories 180. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the inventory cost by the (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER:

(a) 15 units @ $39 = $585 (b) 15 units @ $30 = $450 (c) $3,285/91 = $36.10 per unit;

15 units @ $36.10 = $541.50

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 1:24 PM

Page 111

Chapter 7 - Inventories 181. The units of an item available for sale during the year were as follows: Jan. 1 Inventory Mar. 4 Purchase June 7 Purchase Nov. 15 Purchase

25 units at $45 15 units at $50 35 units at $58 20 units at $65

There are 30 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using FIFO. ANSWER: POINTS: DIFFICULTY:

$1,880 (20 units at $65 and 10 units at $58) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 182. The units of an item available for sale during the year were as follows: Jan. 1 Apr. 4 May 20 Oct. 30

Inventory Purchase Purchase Purchase

10 units at $25 15 units at $24 20 units at $28 18 units at $30

There are 19 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using LIFO. ANSWER: POINTS: DIFFICULTY:

$466 (10 units at $25 and 9 units at $24) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:21 PM Copyright Cengage Learning. Powered by Cognero.

Page 112

Chapter 7 - Inventories 183. The beginning inventory and purchases of an item for the period were as follows: Beginning inventory First purchase Second purchase Third purchase

6 units at $70 each 10 units at $75 each 18 units at $80 each 10 units at $90 each

The company uses the periodic system, and there were 15 units in the inventory at the end of the period. Determine the cost of the 15 units in the inventory by each of the following methods, presenting details of your computations: (a) first-in, first-out; (b) last-in, first-out; (c) average cost. Do not round your intermediate calculations. Round your final answer to two decimal places. ANSWER:

(a) 10 units @ $90 5 units @ $80 Total

$ 900 400 $1,300

(b) 6 units @ $70 9 units @ $75 Total

$ 420 675 $1,095

$79.7727 $1,196.59

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 184. Beginning inventory and purchases and sales data for T-shirts are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

24 units 26 units 36 units 18 units 20 units

@ @

$10 $12

$15

Assuming the business maintains a periodic inventory system, calculate the cost of merchandise sold and ending Copyright Cengage Learning. Powered by Cognero.

Page 113

Chapter 7 - Inventories inventory under the following assumptions: a. FIFO b. LIFO c. Average cost (round cost of merchandise sold and ending inventory to the nearest dollar) ANSWER:

a. FIFO Apr.

3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

14 Sale

Cost of merchandise sold

24 units @ 10 12 units @ 12 14 units @ 12 6 units @ 15 56

$240 144 168 90 $642

Ending inventory

12 units @ 15

$180

b. LIFO Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

Cost of merchandise sold

18 units @ 15 18 units @ 12 8 units @ 12 12 units @ 10 56

$270 216 96 120 $702

Ending inventory

12 units @ 10

$120

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

56 × $12.09

$677

25 Sale

14 Sale 25 Sale

c. Average cost Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale Average cost $822/68 = $12.09 Apr. 14 and 25 Cost of merchandise sold Copyright Cengage Learning. Powered by Cognero.

Page 114

Chapter 7 - Inventories Ending inventory

12 × $12.09

$145

POINTS: DIFFICULTY:

Page 115

Chapter 7 - Inventories 185. The units of Product Green-2 available for sale during the year were as follows: Apr. 1 June 16 Sept. 28

Inventory Purchase Purchase

15 units 29 units 45 units

@ @ @

$30 $33 $35

There are 17 units of the product in the physical inventory at September 30. The periodic inventory system is used. Determine the cost of merchandise sold by the (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER:

(a) FIFO

15 units @ $30 = 29 units @ $33 = 28 units @ $35 = Total

(b) LIFO

45 units @ $35 = 27 units @ $33 = Total

$ 450 957 980 $2,387 $1,575 891 $2,466

$2,982/89 = $33.51 72 units @ $33.51 =

$2,412.72

POINTS: DIFFICULTY:

Page 116

Chapter 7 - Inventories 186. Complete the chart, indicating whether LIFO or FIFO would give the highest and lowest amounts for each item, assuming a period of increasing costs. Highest Amount

Lowest Amount

Cost of merchandise sold Gross profit Net income Ending merchandise inventory

ANSWER: Cost of merchandise sold Gross profit Net income Ending merchandise inventory

Highest Amount LIFO FIFO FIFO FIFO

Lowest Amount FIFO LIFO LIFO LIFO

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:29 PM

Page 117

Chapter 7 - Inventories 187. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the difference in gross profit between the LIFO and FIFO inventory cost systems.

ANSWER:

FIFO cost of merchandise sold (16 × $30) + (30 × $35) + (30 × $39) LIFO cost of merchandise sold (45 × $39) + (30 × $35) + (1 × $30) Difference

$2,700 2,835 $ 135

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 118

Chapter 7 - Inventories 188. Applying the lower of cost or market to each item of inventory, what should the total inventory value be for the following items?

Item

Inventory Quantity

Cost per Unit

A B C

300 200 100

$15.00 14.00 17.00

Market value per Unit $14.50 15.00 17.50

Total Cost

Total Market

$4,500 2,800 1,700

$4,350 3,000 1,750

ANSWER: Total

Inventory Item Quantity A 300 B 200 C 100

Cost per Market Value Unit per Unit $15.00 $14.50 14.00 15.00 17.00 17.50

Total

Cost Market LCM $4,500 $4,350 $4,350 2,800 3,000 2,800 1,700 1,750 1,700 $8,850

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:31 PM

Page 119

Chapter 7 - Inventories 189. Determine the total value of the merchandise using net realizable value. Item Doll Horse

Quantity 10 5

Selling Price

Commission $7 9

$2 3

ANSWER: Item Doll Horse

Quantity 10 5

Selling Price $7 9

Total

Commission $2 3

Total $50 30 $80

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:32 PM

Page 120

Chapter 7 - Inventories 190. During the taking of its physical inventory on December 31, Almond Supplies Company incorrectly counted its inventory as $545,000 instead of the correct amount of $554,000. Indicate the effects of the misstatement on Almond Supplies Company’s balance sheet and income statement for the year ended December 31. Amount of Misstatement Overstatement (Understatement)

ANSWER: Balance Sheet: Merchandise inventory understated Current assets understated Total assets understated Owner’s equity understated

$(9,000) (9,000) (9,000) (9,000)

Income Statement: Cost of merchandise sold overstated Gross profit understated Net Income understated

$ 9,000 (9,000) (9,000)

POINTS: DIFFICULTY:

Page 121

Chapter 7 - Inventories 191. While taking a physical inventory, a company counts its inventory as less than the actual amount on hand. How will this error affect the income statement? ANSWER: POINTS: DIFFICULTY:

Net income will be understated. 1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 122

Chapter 7 - Inventories 192. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Product C Product D

Inventory Quantity 300 420

Unit Cost Price $6 12

Unit Market Price $ 5 14

ANSWER: Total

Item Product C Product D Total

Inventory Quantity

Cost per Unit

Market Value per Unit

300

420

Cost

Market LCM

$1,800

$1,500 $1,500

5,040

5,880

$6,840

$7,380 $6,540

5,040

POINTS: DIFFICULTY:

Page 123

Chapter 7 - Inventories 193. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Gear X Gear Y

Inventory Quantity 175 225

Unit Cost Price $33 27

Unit Market Price $29 28

ANSWER: Total

Item Gear X Gear Y Total

Market Inventory Cost Value per Quantity per Unit Unit 175 $33 $29 225 27 28

Cost Market LCM $ 5,775 $ 5,075 $ 5,075 6,075 6,300 6,075 $11,850 $11,375 $11,150

POINTS: DIFFICULTY:

Page 124

Chapter 7 - Inventories 194. Basic inventory data for April 30 are presented below for a business that employs the lower-of-cost-or-market basis of inventory valuation to each category. Inventory Commodity Quantity

(a) (b)

Cost per

Market Value

Unit

per Unit

Total Cost

Market

LCM

$ 52

$ 55

_______

155

150

_______

Complete the table. Determine the amount of reduction in the inventory at April 30 attributable to market decline.

ANSWER:

(a) Total Inventory Commodity Quantity A 35 B 20 C 25 D 40 Total

Cost Market per Value Unit per Unit Cost $ 52 $ 55 $1,820 155 150 3,100 82 85 2,050 58 55 2,320 $9,290

Market

LCM

$1,925 3,000 2,125

$1,820 3,000 2,050 2,200 $9,070

2,200 $9,250

(b) $220 ($9,290 – $9,070) POINTS: DIFFICULTY:

Page 125

Chapter 7 - Inventories 195. Hampton Co. took a physical count of its inventory on December 31. In addition, it had to decide whether or not the following items should be added to this count. (a) (b) (c)

(d) (e) (f)

Merchandise on hand had been sold earlier in the year but had been returned by customers for various warranty repairs. Hampton Co. sent merchandise on a consignment basis on December 31 just prior to the physical count. On December 22, Hampton Co. ordered merchandise on FOB destination terms. The merchandise was shipped by the supplier on December 30 but had not been received by December 31. On December 27, Hampton Co. ordered merchandise on FOB shipping point terms. The merchandise was shipped on December 29 but had not been received by December 31. Merchandise sold FOB shipping point on December 31 was picked up by the freight company just before closing on December 31. Merchandise shipped to a customer FOB destination was picked up by the freight company on December 28 but had not arrived at its destination as of December 31.

Answer "yes" or "no" to indicate which items should and should not be added to the December 31 inventory count. ANSWER:

(a) (b) (c) (d) (e) (f)

no yes no yes no yes

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM 196. a. Explain the effect of the following on the financial statements: Goods held on consignment were included in the ending inventory count. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. Copyright Cengage Learning. Powered by Cognero.

Page 126

Chapter 7 - Inventories b. What happens if inventory errors are not found and corrected? ANSWER:

a. Goods held on consignment were included in the ending inventory count: Goods held on consignment should not be included in the consignee’s ending inventory. By including these goods, ending inventory, gross profit and net income are overstated and cost of merchandise sold is understated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all overstated. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: Goods purchased FOB shipping point become part of inventory when they are shipped to the purchaser. Thus, these goods should have been included in ending inventory even though they were not yet received. By excluding these goods, ending inventory, gross profit, and net income are understated and cost of merchandise sold is overstated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all understated. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: When goods are sold FOB shipping point, title transfers when they are shipped to the purchaser. As such, they should not have been included in ending inventory so this transaction has no error effect on the financial statements.

b. The income statement and balance sheet will have errors in the current year. Inventory errors reverse themselves within two years. If the errors are not discovered, the income statement and balance sheet will be correct at the end of the next year. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:51 PM

Page 127

Chapter 7 - Inventories 197. On the basis of the following data for Sanford Industries as of December 31, determine the value of the inventory at the lower of cost or market. Also, show how the merchandise inventory would appear on the balance sheet (assume that the cost was determined by the FIFO method). Apply lower of cost or market to each inventory item. Commodity Size 4 Size 5 Size 6 Size 7 ANSWER:

Inventory Quantity 9 10 14 12

Cost per Unit $17 17 20 13

Market Value per Unit $19 14 22 15

Inventory valuation = $729

Total Commodity Size 4 Size 5 Size 6 Size 7

Inventory Quantity 9 10 14 12

Cost per Unit $17 17 20 13

Market Value per Unit $19 14 22 15

Totals

Cost $153 170 280 156 $759

Market

LCM

$171 140 308 180 $799

$153 140 280 156 $729

Sanford Industries Balance Sheet December 31 Assets Current assets: Merchandise inventory at lower of cost (first-in, first-out) or market

$729.00

POINTS: DIFFICULTY:

Page 128

Chapter 7 - Inventories 198. Based on the following information compute (a) inventory turnover, (b) average daily cost of merchandise sold, and (c) days' sales in inventory for the current year. Use a 365-day year. (d) If an inventory turnover of 12 is average for the industry, how is this company doing? Item Cost of merchandise sold Inventory ANSWER:

Prior Year $172,900 18,000

Current Year $215,000 12,000

(a)

$215,000 ÷ [($18,000 + $12,000)/2] = $215,000 ÷ $15,000 = 14.33 times

(b)

$215,000 ÷ 365 = $589.04

(c)

$15,000 ÷ $589.04 = 25.5 days

(d)

This company is doing worse than the overall industry.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:54 PM

Page 129

Chapter 7 - Inventories 199. The following data were taken from Castle, Inc. Cost of merchandise sold Inventory, end of year Inventory, beginning of the year

$894,000 78,000 92,000

Determine the inventory turnover ratio and the days’ sales in inventory for Castle Inc. Round to two decimal places. ANSWER:

Inventory Turnover = Cost of Merchandise Sold/Average Inventory Inventory Turnover = $894,000/[($78,000 + $92,000)/2] Inventory Turnover = 10.52

Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Merchandise Sold Days’ Sales in Inventory = $85,000/($894,000/365) Days’ Sales in Inventory = 34.70 days POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:57 PM

Page 130

Chapter 7 - Inventories 200. Based on the following information, compute (a) inventory turnover (b) average daily cost of merchandise sold using a 365-day year and (c) days’ sales in inventory. Cost of merchandise sold Inventory: Beginning Ending

$195,640

ANSWER:

(a) $195,640 ÷ [($20,500 + $18,628)/2] = $195,640 ÷ $19,564 = 10

20,500 18,628

(b) $195,640 ÷ 365 = $536 (c) $19,564 ÷ $536 = 36.5 days POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 4:59 PM 201. The following data were taken from the annual reports of Big Bang Inc., a manufacturer of fireworks, and Orange Inc., a manufacturer of computers. Big Bang Inc. $830,000 190,000 240,000

Cost of merchandise sold Inventory, end of year Inventory, beginning of year

Orange Inc. $11,540,000 320,000 290,000

(a) Determine the (1) inventory turnover and (2) days' sales in inventory for Big Bang and Orange. Round your answers to two decimal places. (b) How would you expect these measures to compare between the companies? Why? ANSWER:

(a) (1) Inventory Turnover: Big Bang Inc.: 3.86 {$830,000/[($190,000 + $240,000)/2]} Orange Inc.: 37.84 {$11,540,000/[($320,000 + $290,000)/2]} (a) (2) Days' Sales in Inventory: Big Bang Inc. Ave. Inv.: ($190,000 + $240,000)/2 = $215,000

Page 131

Chapter 7 - Inventories Ave. Daily COMS: $830,000/365 = $2,274 $215,000/$2,274 = 94.55 days Orange Inc. Ave. Inv.: ($320,000 + $290,000)/2 = $305,000 Ave. Daily COMS: $11,540,000/365 = $31,616 $305,000/$31,616 = 9.65 days (b)

You would expect Big Bang’s inventory turnover to be lower. Big Bang’s business is seasonal in nature, with most of its revenue generated during the major holidays. Much of its nonholiday inventory will most likely turn over very slowly. Orange, on the other hand, turns its inventory over very quickly. A computer manufacturer maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, computer products can quickly become obsolete, so Orange cannot risk building large inventories. For these same reasons, Big Bang’s days' sales in inventory is expected to be higher than Orange’s.

POINTS: DIFFICULTY:

1 Bloom's: Applying Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 3/3/2017 8:27 AM

Page 132

Chapter 7 - Inventories 202. Based on the following data, calculate the estimated cost of the merchandise inventory on March 31 using the retail method.

March 1 Merchandise inventory March 1–31 Purchases (net) March 1–31 Sales

Cost $225,000 454,245

ANSWER: March 1 March 1–31

Merchandise inventory Purchases (net) M erchandise available for sale

Retail $357,600 612,750 835,000 Cost $225,000 454,245 $679,245

Retail $357,600 612,750 $970,350

Ratio of cost to retail: $679,245/$970,350 = 70% March 1–31 March 1–31

S ales Merchandise inventory (at retail) Estimated merchandise inventory at estimated cost ($135,350 × 70%)

835,000 $135,350 $ 94,745

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 133

Chapter 7 - Inventories 203. A business using the retail method of inventory costing determines that merchandise inventory at retail is $2,300,000. If the ratio of cost to retail price is 55%, what is the amount of inventory to be reported on the financial statements? $2,300,000 × 55% = $1,265,000 1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM ANSWER: POINTS: DIFFICULTY:

204. Based on the following data, estimate the cost of ending merchandise inventory using the gross profit method. Sales Estimated gross profit rate

$250,000 25%

Beginning merchandise inventory Purchases (net) Merchandise available for sale

$ 9,000 211,000 $220,000

ANSWER:

Merchandise available for sale Sales Less estimated gross profit ($250,000 × 25%) Estimated cost of merchandise sold Estimated ending merchandise inventory

$220,000 $250,000 62,500 187,500 $ 32,500

POINTS: DIFFICULTY:

Page 134

Chapter 7 - Inventories 205. Fill in the missing amounts from the chart below regarding the calculation of Bean Corporation’s estimated inventory using the retail method of estimation.

Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale

Cost $13,687 ? $82,528

Ratio of cost to retail price: ? Sales for October

Retail $19,553 98,344 $

Merchandise at retail, October 31

? $25,340

Merchandise at cost, October 31

ANSWER: Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale

Cost Retail $13,687 $ 19,553 68,841 98,344 $82,528 $117,897

Ratio of cost to retail price: 70% ($82,528/$117,897) Sales for October Merchandise at retail, October 31

92,557 $ 25,340

Merchandise at cost, October 31 ($25,340 × 70%)

$17,738

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/13/2017 5:03 PM

Page 135

Chapter 7 - Inventories 206. During August, the first month of the fiscal year, sales totaled $875,000 and the cost of merchandise available for sale totaled $850,000. Estimate the cost of the merchandise inventory as of August 31, based on an estimated gross profit rate of 45%. ANSWER:

Merchandise available for sale in August August sales Less estimated gross profit ($875,000 × 45%) Estimated cost of merchandise sold Estimated ending merchandise inventory

$850,000 $875,000 393,750 481,250 $368,750

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 3:59 PM DATE MODIFIED: 2/12/2017 10:33 AM

Page 136

Chapter 7 - Inventories 207. On the basis of the following data, estimate the cost of the merchandise inventory at March 31 by the retail method.

March 1 March 1–31 March 1–31

Merchandise inventory Purchases (net) Sales

Cost $250,000 850,000

Retail $ 350,000 1,650,000 845,000

ANSWER: March 1 Merchandise inventory March 1-31 Purchases (net) Merchandise available for sale Ratio of cost to retail price: 55% ($1,100,000/$2,000,000) Sales for March Merchandise inventory, March 31 at retail Merchandise inventory, March 31 at est. cost ($1,155,000 × 55%)

Cost $ 250,000 850,000 $1,100,000

Retail $ 350,000 1,650,000 $2,000,000

845,000 $1,155,000 $ 635,250

POINTS: DIFFICULTY:

Page 137

Chapter 7 - Inventories 208. On the basis of the following data, determine the estimated cost of the inventory as of March 31 by the retail method, presenting details of the computation in good order.

March 1 Merchandise inventory March 1–31 Purchases (net) March 1–31 Sales

Cost $310,000 307,250

ANSWER: Merchandise inventory, March 1 Purchases in March (net) Merchandise available for sale Ratio of cost to retail price: $617,250 ÷ $1,065,000 = 58% Sales in March Merchandise inventory, March 31, at retail price Merchandise inventory, March 31, at estimated cost price ($665,000 × 58%)

Retail $550,000 515,000 400,000 Cost $310,000 307,250 $617,250

Retail $ 550,000 515,000 $1,065,000

400,000 $ 665,000 $385,700

POINTS: DIFFICULTY:

Page 138

Chapter 8 - Internal Control and Cash True / False 1. The Sarbanes-Oxley Act applies only to companies whose stock is traded on public exchanges. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:46 PM 2. Sarbanes-Oxley’s purpose is to maintain public confidence and trust in the financial reporting of companies. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 8 - Internal Control and Cash 3. There are three internal control objectives and they are to safeguard the company's reputation, ensure accurate financial reports, and ensure compliance with applicable laws. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:46 PM 4. The Sarbanes-Oxley Act requires that financial statements of all public companies report on management's conclusions about the effectiveness of the company's internal control procedures. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:46 PM

Page 2

Chapter 8 - Internal Control and Cash 5. Sarbanes-Oxley requires sole proprietorships to maintain strong and effective internal controls and thus deter fraud and prevent misleading financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:47 PM 6. The control environment in an internal control structure is the overall attitude of management and employees about the importance of internal control. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:04 PM

Page 3

Chapter 8 - Internal Control and Cash 7. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:05 PM 8. Internal control is enhanced by separating the control of a transaction from the record-keeping function. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 8 - Internal Control and Cash 9. A backlog in recording transactions is an example of a warning sign from the accounting system. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:05 PM 10. Money orders are considered cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:05 PM

Page 5

Chapter 8 - Internal Control and Cash 11. A customer's check received in settlement of an account receivable is considered cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:06 PM 12. Businesses that have several bank accounts, petty cash, and cash on hand would maintain a separate ledger account for each type of cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:06 PM

Page 6

Chapter 8 - Internal Control and Cash 13. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:06 PM 14. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded cash overages for the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:06 PM

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Chapter 8 - Internal Control and Cash 15. If the balance in Cash Short and Over at the end of a period is a credit, it should be reported as "Other Income" on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:07 PM 16. An example of good internal controls over cash payments is the taking of all cash discounts offered. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 17. A voucher is a form on which is recorded pertinent data about a liability and the particulars of its payment. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:07 PM 18. When the voucher system is used, the amount due on each voucher represents the credit balance of an account payable if the voucher is in full payment to a creditor. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 19. A voucher system is an example of an internal control procedure over cash payments. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:08 PM 20. A voucher is a written authorization to make a cash payment. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 21. The bank often informs the company of bank service charges by including a credit memo with the monthly bank statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:09 PM 22. Bank customers are considered creditors of the bank so the bank shows their accounts with credit balances on the bank's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:09 PM

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Chapter 8 - Internal Control and Cash 23. Depositing all cash, checks, etc., in a bank and paying with checks is an internal control procedure over cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:09 PM 24. For efficiency of operations and better control over cash, a company should maintain only one bank account. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 25. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:10 PM 26. In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 27. In preparing a bank reconciliation, the amount indicated by a debit memo for bank service charges is added to the balance per company's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:10 PM 28. In preparing a bank reconciliation, the amount of a canceled check omitted from the journal is added to the balance per company's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 29. A check for $342 was erroneously charged by the bank as $432. In order for the bank reconciliation to balance, you must add $90 to the bank statement balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 10:56 PM 30. If an adjustment for an NSF check is made in a company’s bank reconciliation, then the company must have written a bad check during the month. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 31. The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:11 PM 32. All bank memos reported on the bank reconciliation require entries in the company's accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 33. The bank reconciliation is an important part of the system of internal controls. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:12 PM 34. The main reason that the bank statement cash balance and the company's cash balance do not initially balance is due to timing differences. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 35. The bank reconciles its statement to the company's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:12 PM 36. In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 37. In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal for an amount larger than the amount of the check is added to the balance per company's records. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:13 PM 38. A check outstanding for two consecutive months will appear only on the first month's bank reconciliation. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 39. After a bank reconciliation is completed, journal entries are prepared for items in the balance per company's records as well as items in the balance per bank statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:13 PM 40. A business that requires all cash payments be made by check cannot use a petty cash system. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:14 PM

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Chapter 8 - Internal Control and Cash 41. In establishing a petty cash fund, a check is written for the amount of the fund and is recorded as a debit to Accounts Payable and a credit to Petty Cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:14 PM 42. Expenditures from a petty cash fund are documented by a petty cash receipt. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 43. The sum of the money on hand and petty cash receipts in a petty cash fund will always be equal to the balance in the petty cash account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:14 PM 44. When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since the fund was last replenished. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 45. Most companies that have several bank accounts, petty cash, and cash on hand would list each separately on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:15 PM 46. A petty cash fund is used to pay relatively large amounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 47. The petty cash fund eliminates the need for a bank checking account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:15 PM 48. A compensating balance occurs when a bank may require a company to maintain a maximum cash balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:16 PM

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Chapter 8 - Internal Control and Cash 49. Cash equivalents include short-term investments that will be converted to cash within 120 days. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:16 PM 50. Money market accounts, commercial paper, and U.S. Treasury bills are examples of cash equivalents. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:16 PM

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Chapter 8 - Internal Control and Cash 51. The ratio of cash to monthly cash expenses includes both cash and cash equivalents in the numerator. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 8:08 PM Multiple Choice 52. Sarbanes-Oxley applies to a. publicly held companies b. not-for-profit organizations c. privately held businesses d. All of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:20 AM

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Chapter 8 - Internal Control and Cash 53. "To maintain public confidence and trust in the financial reporting of companies" is the purpose of a. the FASB b. the IRS c. Sarbanes-Oxley d. GAAP ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-01 - 08-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.03 - Legal BUSPROG: Ethics DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:21 AM 54. Which of the following is not an element of internal control? a. risk assessment b. monitoring c. information and communication d. cost-benefit considerations ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:22 AM

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Chapter 8 - Internal Control and Cash 55. Which of the following is not a factor that influences a business's control environment? a. management's philosophy and operating style b. organizational structure c. proofs and security measures d. personnel policies ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:22 AM 56. When a firm uses internal auditors, it is adhering to which of the following internal control elements? a. risk assessment b. monitoring c. proofs and security measures d. information and communication ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 57. The objectives of internal control are to a. control the internal organization of the Accounting Department personnel and equipment b. provide reasonable assurance that assets are safeguarded and used for business purposes, financial reports are accurate, and laws and regulations are complied with c. prevent fraud and promote the social interest of the company d. provide control over "internal-use only" reports and employee internal conduct ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 9:08 PM 58. Which of the following reflects a weak internal control system? a. All employees are well supervised. b. A single employee is responsible for comparing a receiving report to an invoice. c. All employees must take their vacations. d. A single employee is responsible for collecting and recording cash. ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:24 AM

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Chapter 8 - Internal Control and Cash 59. Internal control does not consist of policies and procedures that a. protect assets from misuse b. ensure employees and managers comply with laws and regulations c. guarantee the company will earn a profit d. ensure that business information is accurate ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 60. A firm's internal control environment is not influenced by a. management's operating style b. organizational structure c. personnel policies d. monitoring policies ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 61. An element of internal control is a. risk assessment b. journals c. subsidiary ledgers d. controlling accounts ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 62. A necessary element of internal control is a. a database b. systems design c. systems analysis d. information and communication ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 63. Which of the following should not be considered cash by an accountant? a. money orders b. bank checking accounts c. postage stamps d. travelers' checks ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 64. The cash account in the company's ledger is a(n) a. asset with a normal debit balance b. asset with a normal credit balance c. liability with a normal debit balance d. liability with a normal credit balance ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 65. The portion of an invoice that is returned with payment is a a. remittance advice b. voucher c. debit memo d. credit memo ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:25 AM 66. The debit balance in Cash Short and Over at the end of an accounting period is reported as a. an expense on the income statement b. income on the income statement c. an asset on the balance sheet d. a liability on the balance sheet ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

Page 33

Chapter 8 - Internal Control and Cash 67. Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a bank are called a. accounting controls b. cash controls c. FASB controls d. GAAP controls ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 68. A special form on which is recorded pertinent data about a liability and the particulars of its payment is called a(n) a. invoice b. voucher c. debit memo d. remittance advice ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 69. EFT a. means efficient funds transfer b. can process certain cash transactions at less cost than using the mail would incur c. makes it easier to document purchase and sale transactions d. means effective funds transfer ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 10:35 PM 70. A voucher is usually supported by a. a supplier's invoice b. a purchase order c. a receiving report d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 10:35 PM

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Chapter 8 - Internal Control and Cash 71. Credit memos from the bank a. decrease a bank customer's account b. are used to show a bank service charge c. show that a company has deposited a customer's NSF check d. show that the bank has collected a note receivable for the customer ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 10:36 PM

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Chapter 8 - Internal Control and Cash 72. Consider the following information taken from the cash account. Assume cash payments were 80% of collections. Cash ?? $115,375 ?? $80,275

Beginning balance Collections Disbursements Ending balance

How much was the beginning balance of the cash account? a. $57,200 b. $92,300 c. $103,350 d. $35,100 ANSWER: RATIONALE:

a Disbursements = 80% of Collections = 80% × $115,375 = $92,300 Beginning Balance of Cash Account = Ending Balance + Disbursements – Collections = $80,275 + $92,300 – $115,375 = $57,200 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:25 PM

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Chapter 8 - Internal Control and Cash 73. A bank statement a. is a credit reference letter written by the company's bank b. shows a company the financial position of the bank as of a certain date c. is a bill from the bank for services rendered d. shows the activity that increased or decreased the company's account balance ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 74. A debit or credit memo describing entries in the company's bank account may be enclosed with the bank statement. An example of a credit memo is a. deposited checks returned for insufficient funds b. collection of a promissory note c. a service charge d. notification that a customer's check for $375 was recorded by the company as $735 on the deposit ticket ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 75. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. This item would be included on the bank reconciliation as a(n) a. addition to the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. deduction from the balance per the company's records ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:28 AM 76. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. What entry is required in the company's accounts? a. debit Accounts Payable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. debit Accounts Receivable; credit Cash ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 10:57 PM

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Chapter 8 - Internal Control and Cash 77. A bank reconciliation should be prepared periodically because a. the company's records and the bank's records are in agreement b. the bank has not recorded all of its transactions c. any differences between the company's records and the bank's records should be determined, and any errors made by either party should be discovered and corrected d. the bank must make sure that its records are correct ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 78. The bank reconciliation a. should be prepared by an employee who records cash transactions b. is part of the internal control system c. is for information purposes only d. is sent to the bank for verification ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 79. Journal entries based on the bank reconciliation are required in the company's accounts for a. outstanding checks b. deposits in transit c. bank errors d. book errors ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 80. Accompanying the bank statement was a debit memo for bank service charges. On the bank reconciliation, the item is a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 81. Accompanying the bank statement was a debit memo for bank service charges. What entry is required in the company's accounts? a. debit Miscellaneous Administrative Expense; credit Cash b. debit Cash; credit Other Income c. debit Cash; credit Accounts Payable d. debit Accounts Payable; credit Cash ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 82. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This item would be included in the bank reconciliation as a(n) a. deduction from the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. addition to the balance per the company's records ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 83. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. What entry is required in the company's accounts? a. debit Accounts Payable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. debit Accounts Receivable; credit Cash ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 10:57 PM 84. Receipts from cash sales of $3,200 were recorded incorrectly in the cash receipts journal as $2,300. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 85. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the company. This item is a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 86. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the customer. What entry is required in the company's accounts? a. debit Notes Receivable; credit Cash b. debit Cash; credit Miscellaneous Income c. debit Cash; credit Notes Receivable and Interest Revenue d. debit Accounts Receivable; credit Cash ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 87. The amount of deposits in transit is included on the bank reconciliation as a(n) a. deduction from the balance per the company's books b. deduction from the balance per bank statement c. addition to the balance per bank statement d. addition to the balance per company books ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 88. The amount of the outstanding checks is included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 89. Which of the following items that appeared on the bank reconciliation did not require a journal entry? a. bank service charges b. deposits in transit c. NSF checks d. a check for $630, recorded in the check register for $360 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 90. What entry is required in the company's accounts to record outstanding checks? a. debit Accounts Receivable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. no entry required ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 91. Accompanying the bank statement was a debit memo for an NSF check received from a customer. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:32 AM 92. Accompanying the bank statement was a debit memo for an NSF check received from a customer. What entry is required in the company's accounts? a. debit Other Income; credit Cash b. debit Cash; credit Other Income c. debit Cash; credit Accounts Receivable d. debit Accounts Receivable; credit Cash ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 93. The amount of cash to be reported on the balance sheet at June 30 is the a. total of the Cash column in the cash receipts journal as of June 30 b. adjusted balance appearing in the bank reconciliation for June 30 c. total of the Cash column in the cash payments journal as of June 30 d. balance as of June 30 on the bank statement ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 10:41 PM 94. Which of the following would be deducted from the balance per books on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 95. Which of the following would be added to the balance per books on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 96. Which of the following would be subtracted from the balance per books on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. error in recording a check for $732 as $723 ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 97. Which of the following would be subtracted from the balance per bank on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. service charges ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 98. A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money b. to explain any difference between the company's balance per books with the balance per bank c. by the company's bank d. by the person who is authorized to sign checks ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 99. Minor Company had checks outstanding totaling $19,200 on its April bank reconciliation. In May, Minor Company issued checks totaling $64,900. The May bank statement shows that $47,600 in checks cleared the bank in May. A check of $300 from one of Minor Company's customers was also returned marked "NSF." The amount of outstanding checks on Minor Company's May bank reconciliation should be a. $28,400 b. $66,800 c. $17,300 d. $36,500 ANSWER: RATIONALE:

d Amount of Outstanding Checks on May Bank Reconciliation = Outstanding Checks Appearing on April Bank Reconciliation + Checks Issued in May – Checks Cleared in May = $19,200 + $64,900 – $47,600 = $36,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:26 PM

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Chapter 8 - Internal Control and Cash 100. Rodgers Company gathered the following reconciling information in preparing its May bank reconciliation. Calculate the adjusted cash balance per books on May 31. Cash balance per books, May 31 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check a. $5,870 b. $6,245 c. $4,930 d. $3,845

$5,400 375 650 40 2,400 140

ANSWER: RATIONALE:

a Adjusted Cash Balance per Books on May 31 = Cash Balance per Books on May 31 + Notes Receivable and Interest Collected by Bank – Bank Charge for Check Printing – NSF Check = $5,400 + $650 – $40 – $140 = $5,870 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:28 PM

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Chapter 8 - Internal Control and Cash 101. Gunnar Company gathered the following reconciling information in preparing its September bank reconciliation. Calculate the adjusted cash balance per books on September 30. Cash balance per books, September 30 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check a. $5,130 b. $3,690 c. $3,040 d. $1,590

$2,750 200 630 50 1,250 290

ANSWER: RATIONALE:

c Adjusted Cash Balance per Books on September 30 = Cash Balance per Books on September 30 + Notes Receivable and Interest Collected by Bank – Bank Charge for Check Printing – NSF Check = $2,750 + $630 – $50 – $290 = $3,040 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:29 PM

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Chapter 8 - Internal Control and Cash 102. Jamison Company gathered the following reconciling information in preparing its June bank reconciliation: Cash balance per bank, June 30 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check

$13,000 4,000 7,000 2,500 35 1,900

Using the above information, determine the cash balance per books (before adjustments) for Jamison Company. a. $8,065 b. $10,565 c. $15,065 d. $6,435 ANSWER: RATIONALE:

d Adjusted Balance = Cash Balance per Bank on June 30 + Deposits in Transit – Outstanding Checks = $13,000 + $2,500 – $7,000 = $8,500 Cash Balance per Books (before adjustment) = Adjusted Balance + NSF Checks + Bank Service Charge – Note Receivable Collected by Bank = $8,500 + $1,900 + $35 – $4,000 = $6,435 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:30 PM

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Chapter 8 - Internal Control and Cash 103. Thompson Company gathered the following reconciling information in preparing its October bank reconciliation: Cash balance per bank, October 31 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check

$17,000 4,800 6,500 3,000 50 2,300

Using the above information, determine the cash balance per books (before adjustments) for Thompson Company. a. $11,050 b. $19,450 c. $15,950 d. $11,150 ANSWER: RATIONALE:

a Adjusted Balance = Cash Balance per Bank on October 31 + Deposits in Transit – Outstanding Checks = $17,000 + $3,000 – $6,500 = $13,500 Cash Balance per Books (before adjustments) = Adjusted Balance + NSF Checks + Bank Service Charge – Note Receivable Collected by Bank = $13,500 + $2,300 + $50 – $4,800 = $11,050 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:31 PM

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Chapter 8 - Internal Control and Cash 104. During a bank reconciliation process, a. outstanding checks and deposits in transit are added to the bank statement balance b. outstanding checks are subtracted and deposits in transit are added to the bank statement balance c. outstanding checks and deposits in transit are subtracted from the bank statement balance d. outstanding checks are added and deposits in transit are subtracted from the bank statement balance ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 105. The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks

$16,750 16,125 80 2,195 950 3,850

What is the adjusted balance on the bank reconciliation? a. $14,470 b. $10,705 c. $15,095 d. $15,720 ANSWER: RATIONALE:

c Adjusted Balance from Bank Section of Reconciliation = Balance as per Bank + Deposit in Transit – Outstanding Checks = $16,750 + $2,195 – $3,850 = $15,095 Adjusted Balance from Company Section of Reconciliation = Balance as per Company Records – Bank Service Charges – NSF Check = $16,125 – $80 – $950 = $15,095 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:31 PM

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Chapter 8 - Internal Control and Cash 106. In the normal operation of business, you receive a check from a customer and deposit it into your checking account. With your bank statement, you are advised that this check for $775 is “NSF.” The bank also informs you that due to the amount of activity on your business account the monthly service charge is $75. During a bank reconciliation, you will a. subtract both values from balance according to bank b. add both values to balance according to books c. add both values to balance according to bank d. subtract both values from balance according to books ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 107. A $150 petty cash fund has cash of $54 and receipts of $83. The journal entry to replenish the account would include a a. credit to Petty Cash for $29 b. debit to Cash for $83 c. debit to Cash Short and Over for $13 d. credit to Cash for $54 ANSWER: RATIONALE:

c Cash Short and Over Amount = Petty Cash Fund – Cash in Petty Cash Fund – Cash Receipts = $150 – $54 – $83 = $13 The journal entry to replenish the account would include a debit to Cash Short and Over account for $13. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:32 PM

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Chapter 8 - Internal Control and Cash 108. A $135 petty cash fund has cash of $18 and receipts of $120. The journal entry to replenish the account would include a a. credit to Petty Cash for $120 b. debit to Cash for $120 c. credit to Cash Short and Over for $3 d. credit to Cash for $102 ANSWER: RATIONALE:

c Cash Short and Over Amount = Cash in Petty Cash Fund + Cash Receipts – Petty Cash Fund = $18 + $120 – $135 = $3 The journal entry to replenish the account would include a credit to Cash Short and Over account for $3. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:33 PM 109. Entries are made to the petty cash account when a. making payments out of the fund b. recording shortages in the fund c. replenishing the petty cash fund d. establishing the fund ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 8 - Internal Control and Cash 110. The type of account and normal balance of Petty Cash is a(n) a. revenue, credit b. asset, debit c. liability, credit d. expense, debit ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 111. The debit recorded in the journal to reimburse the petty cash fund is to a. Petty Cash b. Accounts Receivable c. Cash d. various accounts for which the petty cash was disbursed ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 112. A $200 petty cash fund has cash of $20 and receipts of $177. The journal entry to replenish the account would include a credit to a. Cash for $20 b. Cash Short and Over for $3 c. Petty Cash for $190 d. Cash for $180 ANSWER: RATIONALE:

d Amount Required to Replenish the Petty Cash Fund = Petty Cash Fund – Cash Remaining in the Petty Cash Fund = $200 – $20 = $180 The journal entry to replenish the account would include a credit to Cash for $180. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:34 PM 113. Cash equivalents include a. checks b. coins and currency c. money market accounts and commercial paper d. stocks and short-term bonds ANSWER: POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 114. Cash equivalents a. are illegal in some states b. will be converted to cash within two years c. will be converted to cash within 90 days d. will be converted to cash within 120 days ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM 115. A minimum cash balance required by a bank is called a. cash in bank b. a cash equivalent c. a compensating balance d. an EFT ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 116. Which of the following would not be included with the cash and cash equivalents on the balance sheet? a. commercial paper b. short-term receivables c. certificates of deposit d. money market mutual funds ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 4:41 AM 117. Pilger Corporation has cash on hand at year-end of $201,000 and a negative cash flow from operations of $144,000. What is the ratio of cash to monthly cash expenses? a. 12.0 months b. 7.2 months c. 1.4 months d. 16.8 months ANSWER: RATIONALE:

d Monthly Cash Expenses = Negative Cash Flow from Operations/12 = $144,000/12 = $12,000

Ratio of Cash to Monthly Cash Expenses = Cash as of Year-End/Monthly Cash Expenses = $201,000/$12,000 = 16.8 months POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:34 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 8 - Internal Control and Cash 118. During the year, Tempo Inc. has monthly cash expenses of $115,000. On December 31, its cash balance is $1,437,500. The ratio of cash to monthly cash expenses is a. 8.0 months b. 12.5 months c. 87.5 months d. 11.5 months ANSWER: RATIONALE:

b Ratio of Cash to Monthly Cash Expenses = Cash as of Year-End/Monthly Cash Expenses = $1,437,500/$115,000 = 12.5 months POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:36 PM

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Chapter 8 - Internal Control and Cash Matching Match the following elements of internal control: a. Provides reasonable assurance that business goals will be achieved b. Used by management for guiding operations and ensuring compliance with requirements c. Overall attitude of management and employees d. Used to locate weaknesses and improve controls e. Identify, analyze, and assess likeliness of vulnerabilities DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 2:53 AM 119. Control environment ANSWER: c POINTS: 1 120. Risk assessment ANSWER: e POINTS: 1 121. Control procedures ANSWER: a POINTS: 1 122. Monitoring ANSWER: d POINTS: 1 123. Information and communication ANSWER: b POINTS: 1

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Chapter 8 - Internal Control and Cash Match each item to a bank statement adjustment, a company books adjustment, or either. a. Bank statement adjustment b. Company books adjustment c. Either DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 2:55 AM 124. Outstanding checks ANSWER: a POINTS: 1 125. NSF check ANSWER: b POINTS: 1 126. Error in recording a check ANSWER: b POINTS: 1 127. Bank charges ANSWER: b POINTS: 1 128. Note collected by the bank ANSWER: b POINTS: 1 129. Interest revenue ANSWER: b POINTS: 1 130. Deposit in transit ANSWER: a POINTS: 1 Assign the letter to indicate whether the following items would be added or subtracted from the company’s books or the bank statement during the construction of a bank reconciliation. Copyright Cengage Learning. Powered by Cognero.

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Chapter 8 - Internal Control and Cash a. Added to the company’s books b. Subtracted from the company’s books c. Added to the bank statement balance d. Subtracted from the bank statement balance DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 2:57 AM 131. Outstanding checks ANSWER: d POINTS: 1 132. Bank service charge ANSWER: b POINTS: 1 133. Deposit in transit ANSWER: c POINTS: 1 134. NSF check ANSWER: b POINTS: 1 135. EFT deposit from a customer ANSWER: a POINTS: 1 136. Charges for some other company’s safe deposit box were posted to your account ANSWER: c POINTS: 1 137. A $1,000 note from one of your customers was collected by the bank ANSWER: a POINTS: 1

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Chapter 8 - Internal Control and Cash 138. Interest revenue earned by the note above ANSWER: a POINTS: 1 Subjective Short Answer 139. Identify each of the following as relating to (a) the control environment, (b) risk assessment, or (c) control procedures. 1. Mandatory vacations 2. Personnel policies 3. Report of outside consultants on future market changes ANSWER:

1. (c) control procedures 2. (a) the control environment 3. (b) risk assessment POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/20/2017 7:33 AM

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Chapter 8 - Internal Control and Cash 140. List the objectives of internal control and give an example of how each is implemented. ANSWER:

Internal control provides reasonable assurance that: (1) Assets are safeguarded and used for business purposes. (2) Business information is accurate. (3) Employees and managers comply with laws and regulations. Examples are: (1) Duties are separated. (2) Duties are rotated. (3) Reports are submitted to management. There are many other examples that would be correct. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/3/2017 8:33 AM 141. You began your new job as the accountant at Bolivar Industries during the month of December. During your first month, you found several interesting issues. 1) While looking through the invoices, you found Invoices 213–242, 245–271, and 275–290. It appears that invoices 243, 244, 272, 273, and 274 are missing. 2) During the month, Clerk # 3 issued $250 in refunds as compared to Clerks #1, #2, and #4 who issued less than $50 each. 3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month. 4) Business is generally brisk during the holiday season, but two weeks before Christmas there was a sudden increase in slow payments. Required (a) What kind of warning signs could be associated with these issues? (b) What control could you put in place regarding cash refunds mentioned in (a)(2)? ANSWER:

(a) 1) Missing invoices or gaps in transaction numbers could mean that the invoices are being used for fraudulent transactions. 2) An unusually high number of refunds for Clerk #3 could mean that the individual is creating fictitious refunds and pocketing the cash.

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Chapter 8 - Internal Control and Cash 3) The difference could mean that receipts are being pocketed before being deposited. Maybe there is a person responsible for making the deposits on Tuesdays that is the culprit. 4) A sudden increase in slow payments could mean that an employee is pocketing the payments. (b) Surveillance cameras at customer service area. Place supervisor as a second authorizer on refund transactions. Prohibit cash refunds and require exchanges of merchandise instead. Provide employee training. Incorporate special alerts for critical dollar thresholds through company software. Require information about the original transaction to be part of the refund process. POINTS: 1 DIFFICULTY: Challenging Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:02 PM

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Chapter 8 - Internal Control and Cash 142. Two features of internal control are presented in the following sections. Each is followed by a list of four irregularities that occurred in processing data. Identify the one irregularity from each list that would be discovered or prevented by the feature of internal control described. (a)

The sum of the balances of the accounts in the customer's ledger is compared at the end of each month with the balance of the accounts receivable account in the general ledger by a person who has no responsibility for maintaining either the general ledger or the customers ledger. (1) (2) (3) (4)

(b)

Five hours of services were rendered but the customer was only billed for four hours. A cash receipt of $750 was recorded correctly in the accounts receivable controlling account but was posted to the customer's ledger as $75. A bill for services rendered to Cole Co. was erroneously posted to the account of Coleman Co. in the customer's ledger. No entry was made in the accounting records for services rendered to a customer.

Both cash and credit charges for services rendered are recorded on prenumbered invoices. At the end of the day, all invoices are accounted for before the duplicate copies of the invoices are routed to the Accounting Department for entry into the accounts and the cash is sent to the Cashier's Department for deposit. (1) (2) (3) (4)

Some charge customers complained that the monthly statements of account did not add all amounts correctly. Some clerks used incorrect hourly rates in preparing invoices. Some clerks destroyed duplicate copies of cash invoices and misappropriated the cash. Some charge customers complained that the monthly statement of account did not indicate credits for payments made.

(a) (2) (b) (3) POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 5:06 AM ANSWER:

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Chapter 8 - Internal Control and Cash 143. List and define each of the five elements of internal control.

ANSWER:

(1) Control Environment. The control environment is the overall attitude of management and employees about the importance of internal controls. (2) Risk Assessment. Risk assessment is the identification of risks faced by an organization so that management can take necessary actions to control them. (3) Control Procedures. The control procedures are the policies and procedures designed to provide reasonable assurance that the business goals are met and fraud is prevented. (4) Monitoring. Monitoring locates deficiencies in the internal control system and improves control effectiveness. (5) Information and Communication. Information and communication to management about the control environment, risk assessment, control procedures, and monitoring elements of internal control are needed by management to guide operations and ensure compliance with reporting, legal, and regulatory requirements.

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/15/2017 9:09 PM

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Chapter 8 - Internal Control and Cash 144. The following procedures were recently implemented at Health Station, Inc. For each procedure, indicate whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness, explain why. (a) All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the accounts. (b) The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the supporting documentation is forwarded to the treasurer’s office for approval. (c) At the end of each day, all cash receipts are placed in the bank’s night depository. (d) The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer. ANSWER:

(a) This is a weakness. The mail clerk should prepare an initial listing of cash remittances before forwarding the cash receipts to the cashier. This establishes initial accountability for the cash receipts. The mail clerk should forward a copy of the listing of remittances to the accounts receivable clerk for recording in the accounts. (b) This is a strength. (c) This is a strength.

(d) This is a weakness. The bank reconciliation should be prepared by someone not involved with the handling or recording of cash. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:04 PM

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Chapter 8 - Internal Control and Cash 145. The following procedures were recently implemented at Pampered Pets, Inc. For each procedure, indicate whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness, explain why. (a) At the end of the day, cash register clerks are required to use their own funds to make up any cash shortages in their registers. (b) At the end of the day, an accounting clerk compares the duplicate copy of the daily cash deposit slip with the deposit receipt obtained from the bank. (c) After necessary approvals have been obtained for the payment of a voucher, the treasurer signs and mails the check. The treasurer then stamps the voucher and supporting documentation as paid and returns the voucher and supporting documentation to the accounts payable clerk for filing. (d) Along with the petty cash receipts for postage, office supplies, etc., several postdated employee checks are in the petty cash fund. ANSWER:

(a) This is a weakness. Requiring cash register clerks to make up any cash shortages from their own funds gives the clerks an incentive to shortchange customers. That is, the clerks will want to make sure that they don’t have a shortage at the end of the day. In addition, one might also assume that the clerks can keep any overages. This would again encourage clerks to shortchange customers. The shortchanging of customers will create customer complaints, etc. The best policy is to report any cash shortages or overages at the end of each day. If there is consistently cash short or over, then corrective action (training, removal, etc.) could be taken. (b) This is a strength. (c) This is a strength.

(d) This is a weakness. Employees should not be allowed to use the petty cash fund to cash personal checks. In any case, postdated checks should not be accepted. In effect, postdated checks represent a receivable from the employees. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-02 - 08-02 ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/3/2017 8:35 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 8 - Internal Control and Cash 146. The following selected transactions relate to cash collections for a firm that maintains a $100 change fund at all times. Present entries to record the transactions for each of the two days of cash receipts from sales. (a) (b)

Actual cash in cash register, $5,412.36; cash receipts per cash register tally, $5,413.07. Actual cash in cash register, $3,712.95; cash receipts per cash register tally, $3,712.16.

ANSWER:

(a) Cash 5,412.36 Cash Short and Over 0.71 Sales (b) Cash 3,712.95 Cash Short and Over Sales POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 3:37 AM

5,413.07

0.79 3,712.16

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Chapter 8 - Internal Control and Cash

147. The actual cash received during the week ended June 6 for cash sales was $8,276, and the amount indicated by the cash regis $8,262. Journalize the entry to record the cash receipts and cash sales.

Date

Journal Post. Ref.

Description

Debit

Credit

ANSWER: Journal Date June 6

Description

Post. Ref.

Debit

Cash Sales Cash Short and Over

POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 148. The actual cash received during the week ended October 31 for cash sales was $23,447, and the amount indicated by the cash register total was $23,457. Journalize the entry to record the cash receipts and cash sales.

Date

Journal Post. Ref.

Description

Debit

Credit

ANSWER: Journal Post. Debit Ref. 23,447 10

Date Description Oct. 31 Cash Cash Short and Over Sales

Credit

23,457

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:05 PM 149. Scharf Company is a retailer located in a state without sales tax. The following data were given to you to complete the transactions for the day’s sales to be recorded. All cash drawers start with $100 in change.

Cash in drawer Sales reading Difference

Reg. 1 $974.50 879.50

Reg. 2 $1,383.66 1,298.16

Reg. 3 $939.46 839.46

Reg. 4 $1,137.91 1,030.33

Record the journal entries for EACH cash register to determine the cashier’s accuracy. Description

Debit

Credit

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Chapter 8 - Internal Control and Cash

ANSWER:

Each cash drawer starts with $100. This must be subtracted from the total cash in drawer to determine the cash over/short amount.

Reg. Description 1 Cash Cash Short and Over Sales 2

Debit 874.50 5.00

Credit

879.50

Cash Cash Short and Over Sales

1,283.66 14.50

Cash Sales

839.46

Cash Cash Short and Over Sales

1,037.91

1,298.16

839.46

7.58 1,030.33

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/3/2017 8:37 AM

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Chapter 8 - Internal Control and Cash 150. Describe the features of a voucher system and list typical supporting documents for a voucher. ANSWER:

A voucher system is used to control cash payments. It should provide reasonable assurance that only authorized payments are made and that all cash discounts are taken. Specifically, a voucher system is a set of procedures for authorizing and recording liabilities and cash payments. Typical supporting documents for a voucher are a supplier's invoice, a purchase order, and a receiving report.

After a voucher is prepared, it is submitted for approval. Once approved, the voucher is recorded in the accounts and filed by due date. Upon payment, the voucher is recorded in the same manner as the payment of an account payable. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.8-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:06 PM

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Chapter 8 - Internal Control and Cash 151. The actual cash received during the week ended June 7 for cash sales was $18,632, and the amount indicated by the cash register total was $18,628. Journalize the entry to record the cash receipts and cash sales. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date June 7

Description

Post. Ref.

Cash Sales Cash Short and Over

Debit 18,632

Credit 18,628 4

POINTS: DIFFICULTY:

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Chapter 8 - Internal Control and Cash 152. Consider the following journal entry made by Jones Company for one day's sales of a single cashier. What might have happened to create this amount of Cash Short and Over difference? Give three possible reasons for this difference. Cash Cash Short and Over Sales ANSWER:

2,235 100 2,135 There are many possibilities, but the most likely culprits are as follows:

1. The beginning change fund in the drawer was not considered. 2. A collection of an accounts receivable could have not been recorded, making the cash “heavy” to sales. 3. A customer may have used a debit card and requested $100 cash back that was not given to the customer (expect a call from the customer). 4. A sale for the exact amount of $100 was not recorded into the sales of the cash register. However, this is a VERY improbable occurrence. 5. A void could have taken place and the cash not refunded or possibly not removed. In this case, you would certainly investigate the voided items and the actions of the cashier as well as the history of cash reconciliations for this cashier. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-03 - 08-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:07 PM

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Chapter 8 - Internal Control and Cash 153. List the principal advantages of electronic funds transfers. ANSWER:

EFTs cost less than receiving cash payments through the mail. EFTs enhance internal controls over cash, since the cash is received directly by the bank without any employees handling cash. EFTs reduce late payments from customers and speed up the processing of cash receipts.

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:47 AM

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Chapter 8 - Internal Control and Cash 154. You are trying to explain debit and credit memos that appear on bank statements and whether these will increase or decrease your company’s bank account balance. Complete the following table to help your new staff understand. Debit or Credit Memo

Item

Increases or Decreases the Company’s Bank Account Balance

EFT payment Bank correction of an error due to posting another customer’s check to your account Service charge Note and interest collected for our company NSF check Bank correction of an error recording a $250 deposit as $520 EFT deposit ANSWER:

Item

Debit or Credit Memo

EFT payment Debit Bank correction of an error due to posting Credit another customer’s check to your account Service charge Debit Note and interest collected for our Credit company NSF check Debit Bank correction of an error recording a Debit $250 deposit as $520 EFT deposit Credit

Increases or Decreases the Company’s Bank Account Balance Decrease Increase Decrease Increase Decrease Decrease Increase

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 8:08 AM

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Chapter 8 - Internal Control and Cash 155. The following items may appear on a bank statement: 1. 2. 3. 4.

NSF check EFT deposit Service charge Bank correction of an error from recording a $300 check as $30

Indicate whether the item would appear as debit or credit memo on the bank statement and whether the item would increase or decrease the balance of your account. Use the following format: Appears on the Bank Statement as a Increases (Decreases) the a Debit or Credit Balance of the Company’s Item No. Memo Bank Account Appears on the

ANSWER:

Bank Statement as a

Increases (Decreases) the

a Debit or Credit

Balance of the Company’s

Item No.

Memo

Bank Account

Debit memo

Decreases

Credit memo

Increases

Debit memo

Decreases

Credit memo

Increases

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:19 PM 156. The following information is from Madison Corporation’s accounting records for May. Check No. 3269 was returned as a double payment and voided. Checks that have not cleared the bank include No. 3252, No. 3260, and series No. 3275–3278. Check No. 3247 3248 3249 3250 3251 3252

Amount Check No. $ 32.64 3263 400.00 3264 309.22 3265 256.00 3266 3,212.17 3267 56.89 3268

Amount $ 24.87 45.00 33.78 756.77 84.34 789.00 Page 85

Chapter 8 - Internal Control and Cash 3253 3254 3255 3256 3257 3258 3259 3260 3261 3262

98.02 47.55 1,124.77 250.00 68.00 215.56 38.55 92.65 44.61 72.96

3269 3270 3271 3272 3273 3274 3275 3276 3277 3278

48.90 34.41 872.00 22.00 562.38 512.00 603.50 67.00 301.61 47.88

In addition to the above list of checks, Madison had Check No. 2264 for $32.98 and Check No. 2655 for $45.99 outstanding previously that have not cleared. 1. Create an outstanding checks list for Madison at the end of May. 2. What is the total amount of checks that cleared the bank (written in May)? ANSWER:

1. Madison Company May 31 Outstanding Checks List Check No. 2264 2655 3252 3260 3275 3276 3277 3278 Total

Amount $ 32.98 45.99 56.89 92.65 603.50 67.00 301.61 47.88 $1,248.50

2. Students must remember to not include the voided Check No. 3269. Check No. Amount 3247 $ 32.64 3248 400.00 3249 309.22 3250 256.00 3251 3,212.17 3253 98.02 3254 47.55 3255 1,124.77 3256 250.00 3257 68.00 3258 215.56 3259 38.55 Copyright Cengage Learning. Powered by Cognero.

Page 86

Chapter 8 - Internal Control and Cash 3261 3262 3263 3264 3265 3266 3267 3268 3270 3271 3272 3273 3274 Total

44.61 72.96 24.87 45.00 33.78 756.77 84.34 789.00 34.41 872.00 22.00 562.38 512.00 $9,906.60

POINTS: DIFFICULTY:

Page 87

Chapter 8 - Internal Control and Cash 157. Consider the following information from the cash account. Assume cash payments were 84% of collections. Cash ?? $245,000 ?? $80,275

Beg. balance Collections Disbursements End. balance

How much was the beginning balance of the cash account? ANSWER:

$245,000 × 84% = $205,800

Beginning Cash = $41,075 ($80,275 + $205,800 – $245,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:37 PM

Page 88

Chapter 8 - Internal Control and Cash 158. Jackson Industries has collected the following information but needs assistance completing the table. The cash payments were 90% of collections. Cash ?? $511,770 ?? $102,275

Beg. balance Collections Payments End. balance

How much was the beginning balance of the cash account? ANSWER: Cash $ 51,098 511,770 460,593 102,275

Beg. balance Collections Payments End. balance

Calculations: $511,770 × 90% = Payments of $460,593 Beginning Balance + Collections – Payments = Ending Balance Beg. Cash = $51,098 ($102,275 + $460,593 – $511,770) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-04 - 08-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:08 PM

Page 89

Chapter 8 - Internal Control and Cash 159. Identify each of the following reconciling items as (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company’s records, or (d) a deduction from the cash balance according to the company’s records. Assume that none of the transactions reported by bank debit and credit memos have been recorded by the company. Write "entry" by items that will require a journal entry in the company’s accounts. 1. 2. 3. 4. 5. 6.

Deposits in transit. Bank service charges. NSF check. Outstanding checks. Check for $690 incorrectly recorded by the company as $960. Check for $420 incorrectly recorded by the company as $240.

1. (a) an addition to the cash balance according to the bank statement ANSWER: 2. (d) a deduction from the cash balance according to the company’s records (entry) 3. (d) a deduction from the cash balance according to the company’s records (entry) 4. (b) a deduction from the cash balance according to the bank statement 5. (c) an addition to the cash balance according to the company’s records (entry) 6. (d) a deduction from the cash balance according to the company’s records (entry) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 5:49 AM

Page 90

Chapter 8 - Internal Control and Cash 160. Using the following information, prepare a bank reconciliation for Miller Co. for August 31: (a) (b) (c) (d) (e) (f)

The bank statement balance is $4,690. The cash account balance is $5,080. Outstanding checks amounted to $715. Deposits in transit are $1,020. The bank service charge is $40. A check for $72 for supplies was recorded as $27 in the ledger.

ANSWER: Miller Co. Bank Reconciliation August 31 Cash balance according to bank statement Add deposits in transit not recorded by bank

$4,690 1,020 $5,710 715 $4,995

Deduct outstanding checks Adjusted balance Cash balance according to company's records Deduct: Bank service charge Error in recording Adjusted balance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 8:07 AM

$5,080 $40 45

85 $4,995

Page 91

Chapter 8 - Internal Control and Cash 161. Using the following information, prepare a bank reconciliation for Candace Co. for May 31: (a) (b) (c) (d) (e) (f)

The bank statement balance is $2,936. The cash account balance is $3,194. Outstanding checks amounted to $465. Deposits in transit are $655. The bank service charge is $50. A check for $97 for supplies was recorded as $79 in the ledger.

ANSWER: Candace Co. Bank Reconciliation May 31 Cash balance according to bank statement Add deposits in transit not recorded by bank

$2,936 655 $3,591 465 $3,126

Deduct outstanding checks Adjusted balance Cash balance according to company's records Deduct: Bank service charge Error in recording check Adjusted balance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:37 PM

$3,194 $50 18

68 $3,126

Page 92

Chapter 8 - Internal Control and Cash 162. Bank reconciliation information for Kaden Co. for May 31 is as follows: (a) (b) (c) (d) (e) (f)

Record the appropriate journal entry for Kaden Co. Miscellaneous Administrative Expense Supplies Cash POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:52 AM ANSWER:

50 18 68

Page 93

Chapter 8 - Internal Control and Cash 163. The bank statement for Farmer Co. indicates a balance of $7,735 on June 30. After the journals for June were posted, the cash account had a balance of $4,098. Prepare a bank reconciliation on the basis of the following reconciling items: (a) (b) (c) (d) (e) (f)

Cash sales of $742 were erroneously recorded in the cash receipts journal as $724. Deposits in transit not recorded by bank, $425. Bank debit memo for service charges, $35. Bank credit memo for note collected by bank, $2,475 including $75 interest. Bank debit memo for $256 NSF (not sufficient funds) check from Janice Smith, a customer. Checks outstanding, $1,860.

ANSWER: Farmer Co. Bank Reconciliation June 30

Deduct outstanding checks Adjusted balance

$7,735 425 $8,160 1,860 $6,300

Cash balance according to company's records

$4,098

Cash balance according to bank statement Add deposits in transit not recorded by bank

Add: Note collected by bank, including $75 interest $2,475 18 Error in recording cash sales of $742 ad $724 Deduct: NSF check from Janice Smith Bank service charges Adjusted balance

2,493 $6,591

$ 256 35

291 $6,300

POINTS: DIFFICULTY:

Page 94

Chapter 8 - Internal Control and Cash 164. Accompanying a bank statement for Marsh Land Properties is a credit memo for payment on a $15,000 one-year note receivable and $900 of interest collected by the bank. Marsh Land Properties had been notified by the bank at the time of collection, but had made no entries. Journalize the entry that should be made by Marsh Land to bring the accounting records up to date. ANSWER:

Cash 15,900 Notes Receivable 15,000 Interest Revenue 900 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:09 PM

Page 95

Chapter 8 - Internal Control and Cash 165. For each of the following, explain whether the issue would require you to prepare a journal entry for your company, assuming any original entry is correct. If an entry is required, please include it as part of your answer. (1) The bank recorded your deposit as $91 rather than the actual amount of $191. (2) Two outstanding checks amounted to $450. (3) Company Check No. 538 for postage was recorded incorrectly by the company bookkeeper as $50 instead of $59. (4) The bank paid a check for $500 after the company had issued a stop payment and voided the check. (5) An EFT deposit was made by one of the company’s customers, Atlas Design, for merchandise received. The sale had previously been recorded when shipped and was equal to the payment amount of $125. ANSWER:

(1) If you recorded the deposit correctly in your company’s books, then no additional journal entry is required. (2) Since your company has already recorded these checks correctly, no additional journal entry is required by your company. (3) A journal entry is required by the company to correct the books. In this case, the company would record: Postage Expense Cash

9 9

(4) The bank is at fault here and no additional journal entry is required by the company. (5) Since the company has to be notified by the bank when direct deposits occur, the company will need to make a journal entry. This entry would be: Cash 125 Accounts Receivable, Atlas Design

125

POINTS: DIFFICULTY:

Page 96

Chapter 8 - Internal Control and Cash 166. The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks

$16,750 16,125 80 2,195 950 3,850

What is the adjusted balance on the bank reconciliation? ANSWER: POINTS: DIFFICULTY:

$15,095 ($16,750 + $2,195 – $3,850) or ($16,125 – $80 – $950) 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:54 AM

Page 97

Chapter 8 - Internal Control and Cash 167. The following data were gathered to use in reconciling the bank statement of Build-A-Lot: Balance per bank Balance per company records Bank service charges Deposits in transit NSF checks Outstanding checks

$14,355 14,010 80 4,100 775 5,300

Required (1) What is the adjusted balance on the bank reconciliation? (2) Journalize any necessary entries for Build-A-Lot based on the bank reconciliation. ANSWER:

(1) $13,155 Bank section reconciliation: $14,355 + $4,100 – $5,300 = $13,155 Company section of reconciliation: $14,010 – $80 – $775 = $13,155 (2) Accounts Receivable Miscellaneous Adm. Expense Cash

775 80 855

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:55 AM 168. Roper Electronics received its bank statement for the month of August with an ending balance of $11,740. Roper determined that Check No. 613 for $155 and Check No. 601 for $420 were both outstanding. Also, a $6,900 deposit for August 30 was in transit as of the end of the month. Northern Regional Bank also collected a $5,000 notes receivable on August 1 that was issued March 1. Accrued interest is $250. Northern Regional Bank charged a $35 fee for the collection service. The bank statement reveals a bank service charge of $20. A customer check for $68 was returned with the bank statement marked “NSF.” The ending balance of the Roper cash account is $12,938. Prepare a bank/account reconciliation and any necessary journal entries for the reconciliation. ANSWER: Cash balance according to bank statement Add deposit in transit

$11,740 6,900 $18,640

Deduct outstanding checks: Copyright Cengage Learning. Powered by Cognero.

Page 98

Chapter 8 - Internal Control and Cash No. 601 No. 613

$420 155

575 $18,065

Adjusted balance

$12,938 5,250 $18,188

Cash balance according to Roper Electronics Add note and interest collected by bank Deduct: Check returned because of insufficient funds Collection fee Monthly account fee

$ 68 35 20

123 $18,065

Adjusted balance Aug. 31 Cash Bank Service Charge Expense Notes Receivable Interest Revenue

5,215 35

31 Bank Service Charge Expense Cash

31 Accounts Receivable Cash

5,000 250

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:55 AM 169. Green Valley Bank sent Comstock Industries its end-of-month bank statement for July. The end-of-month balance by the bank is $11,237. The statement shows that a deposit for $4,250 is in transit at the end of the statement period. The statement also revealed that checks for $87, $105, and $95 are outstanding. Green Valley collected a $4,000 note receivable plus $120 of interest revenue. The bank charges $20 for the collection service. The bank charges a monthly account fee of $35. The end-of-month balance per company books is $11,135. Prepare a bank/account reconciliation and write any necessary journal entries for the reconciliation. Copyright Cengage Learning. Powered by Cognero.

Page 99

Chapter 8 - Internal Control and Cash

ANSWER: Cash balance according to bank statement

$11,237

Add deposit in transit, not recorded by bank

4,250 $15,487

Deduct outstanding checks: $ 87 105 95

287

Adjusted balance

$15,200

Cash balance according to Comstock Industries

$11,135 4,120

Add note and interest collected by bank

$15,255 Deduct: Collection fee Bank service charge

$ 20 35

55 $15,200

Adjusted balance July 31 Cash Bank Service Charge Expense Notes Receivable Interest Revenue

4,100 20

31 Bank Service Charge Expense Cash

4,000 120

POINTS: DIFFICULTY:

Page 100

Chapter 8 - Internal Control and Cash a. b. c. d. e. f.

Checks outstanding totaled $5,975. A deposit of $3,796 had been made too late to appear on the bank statement. A check for $1,482 returned with the statement had been incorrectly recorded as $482. The check was originally issued to pay on account. The bank collected $4,515 on a note left for collection of which $515 was interest revenue. Bank service charges for May amounted to $70. A check for $894 was returned by the bank because of insufficient funds.

Prepare a bank reconciliation as of May 31. Journalize the necessary entries. Santiago Co. Bank Reconciliation May 31

Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Santiago Co. Bank Reconciliation May 31 Cash balance according to bank statement Add deposit not recorded by bank

$25,645 3,796 $29,441

Page 101

Chapter 8 - Internal Control and Cash 5,975

Deduct outstanding checks Adjusted balance

$23,466

Cash balance according to company’s records

$20,915 4,515

Add proceeds of note and interest collected by bank

$25,430 $1,000

Deduct error in recording check Bank service charges

Nonsufficient funds check

894

1,964 $23,466

Adjusted balance

Journal Date Description May 31 Cash Note Receivable Interest Revenue

Post. Ref.

31 Accounts Payable Bank Service Charge Expense Accounts Receivable Cash

Debit Credit 4,515 4,000 515 1,000 70 894 1,964

POINTS: DIFFICULTY:

Page 102

Chapter 8 - Internal Control and Cash 171. The bank statement for Jeffrey Co. indicates a balance of $8,785 on October 31. After the journals for October had been posted, the cash account had a balance of $8,998. (a) (b) (c) (d) (e) (f)

Cash sales of $945 had been erroneously recorded in the cash receipts journal as $495. Deposits in transit not recorded by bank, $778. Bank debit memo for service charges, $40. Bank credit memo for note collected by bank, $23,985 plus $885 interest. Bank debit memo for $756 NSF (not sufficient funds) check from Calin Sams, a customer. Checks outstanding, $1,860.

Record the appropriate journal entries that would be necessary for Jeffrey Co. ANSWER: Cash

25,320

Notes Receivable

23,985

Interest Revenue

885

Sales

450

Accounts Receivable, Calin Sams

756

Miscellaneous Administrative Expense

Cash

796

POINTS: DIFFICULTY:

Page 103

Chapter 8 - Internal Control and Cash 172. The bank statement for Gatlin Co. indicates a balance of $7,735 on June 30. After the journals for June had been posted, the cash account had a balance of $4,098. (a) (b) (c) (d) (e) (f)

Cash sales of $742 had been erroneously recorded in the cash receipts journal as $724. Deposits in transit not recorded by bank, $425. Bank debit memo for service charges, $35. Bank credit memo for note collected by bank, $2,475 including $75 interest. Bank debit memo for $256 NSF (not sufficient funds) check from Janice Smith, a customer. Checks outstanding, $1,860.

Record the appropriate journal entries that would be necessary for Gatlin Co. ANSWER:

Cash Note Receivable Interest Revenue Sales

Accounts Receivable—Janice Smith Miscellaneous Administrative Expense Cash POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-05 - 08-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.11 - Bank Reconciliation ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:59 AM

2,493 2,400 75 18 256 35 291

Page 104

Chapter 8 - Internal Control and Cash 173. Journalize the entries to record the following: Mar. 1 31

Established a petty cash fund of $300. The amount of cash in the petty cash fund is now $64. The fund is replenished based on the following receipts: office supplies, $137; selling expenses, $112. Record any discrepancy in the cash short and over account. Journal

Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date Description Mar. 1 Petty Cash Cash

Post. Ref.

31 Office Supplies Selling Expenses Cash Short and Over Cash

Debit Credit 300 300 137 112 13 236

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:11 PM

Page 105

Chapter 8 - Internal Control and Cash 174. On April 2, Granger Sales decides to establish a $125 petty cash fund to relieve the burden on Accounting. (a) Journalize the establishment of the fund. (b) On April 10, the petty cash fund has receipts for mail and postage of $43.50, contributions and donations of $29.50, meals and entertainment of $38.25, and $13.55 in cash. Journalize the replenishment of the fund. (c) On April 11, Granger Sales decides to increase petty cash to $200. Journalize this event. ANSWER:

(a) Apr. 2 Petty Cash Cash

125.00

(b)

10 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash

43.50 29.50 38.25 0.20

11 Petty Cash Cash

75.00

(c)

125.00

111.45

75.00

POINTS: DIFFICULTY:

Page 106

Chapter 8 - Internal Control and Cash 175. The last custodian of the petty cash fund was hospitalized and you have been asked to take stock of the fund and replenish it. When you receive the fund, it has $299 in cash and receipts as follows: Office supplies Advertising Transportation by taxi

$295 120 75

The petty cash fund was established to have $800 in it. Based on what you have found, what journal entry should be recorded to replenish the fund? ANSWER:

Office Supplies 295 Advertising Expense 120 Transportation Expense 75 Cash Short and Over 11 Cash 501 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 6:24 AM

Page 107

Chapter 8 - Internal Control and Cash 176. Journalize the entries to record the following: June 1 Established a petty cash fund of $200. 30 The amount of cash in the petty cash fund is now $57. The fund is replenished based on the following receipts: postage, $25; entertainment, $100; and miscellaneous, $20. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date Description June 1 Petty Cash Cash

Post. Ref.

30 Postage Expense Entertainment Expense Miscellaneous Expense Cash Short and Over Cash

Debit Credit 200 200 25 100 20 2 143

POINTS: DIFFICULTY:

Page 108

Chapter 8 - Internal Control and Cash 177. On April 3, Snappy Sales decides to establish a $135 petty cash fund to relieve the burden on Accounting. (a) Journalize the establishment of the fund. (b) On April 11, the petty cash fund has receipts for mail and postage of $32.75, contributions and donations of $25.25, meals and entertainment of $68.00, and $9.75 in cash. Journalize the replenishment of the fund. (c) On April 12, Snappy Sales decides to increase petty cash to $175. Journalize this transaction. ANSWER:

(a) Apr. 3

(b)

(c)

Petty Cash Cash

135.00

Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash

32.75

Petty Cash

40.00

Cash

135.00

25.25 68.00 0.75 125.25

40.00

POINTS: DIFFICULTY:

Page 109

Chapter 8 - Internal Control and Cash 178. Present entries to record the following transactions: (a) (b)

(c)

Established a petty cash fund of $235. The petty cash fund now has a balance of $42.80. Replenished the fund, based on the following disbursements as indicated by a summary of the petty cash receipts: office supplies, $74.50; miscellaneous administrative expense, $92.75; and miscellaneous selling expense, $18.60. Increased the petty cash fund to $300.

ANSWER:

(a) Petty Cash 235.00 Cash (b) Office Supplies 74.50 Miscellaneous Admin. Expense 92.75 Miscellaneous Selling Expense 18.60 Cash Short and Over 6.35 Cash (c) Petty Cash 65.00 Cash POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-06 - 08-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:13 PM

235.00

192.20

65.00

Page 110

Chapter 8 - Internal Control and Cash 179. On August 3, Sonar Sales decides to establish a $275 petty cash fund to relieve the burden on Accounting. (a) Journalize the establishment of this fund. (b) On August 11, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of $53.25, meals and entertainment of $63.85, and $32.75 in cash. Journalize the replenishment of the fund. (c) On August 12, Sonar Sales decides to increase petty cash to $400. Journalize this transaction. ANSWER:

(a) Aug. 3 Petty Cash Cash

275.00 275.00

(b)

11 Mail and Postage Expense 124.75 Contributions and Donations Expense 53.25 Meals and Entertainment Expense 63.85 Cash Short and Over 0.40 Cash 242.25

(c)

12 Petty Cash Cash

125.00 125.00

POINTS: DIFFICULTY:

Page 111

Chapter 8 - Internal Control and Cash 180. Stephanie Jo Company established a petty cash fund of $300 on May 1. At the end of the month, the petty cash fund has $42 in cash; receipts for postage, $39; entertainment, $146; and office supplies, $70. Prepare the needed journal entries, recording any discrepancy in the cash short and over account.

Date

Journal Post. Ref.

Description

Debit

Credit

ANSWER: Journal Date

Description

Post. Ref.

May 1 Petty Cash

Debit Credit 300

Cash 31 Postage Expense

300 39

Entertainment Expense

146

Office Supplies

Cash Short and Over

Cash

258

POINTS: DIFFICULTY:

Page 112

Chapter 8 - Internal Control and Cash 181. Journalize the entries to record the following: Sept. 1 Established a petty cash fund of $350. 30 The amount of cash in the petty cash fund is now $130. The fund is replenished based on the following receipts: office supplies, $116; postage, $100.

Date

Description

Journal Post. Ref.

Debit

Credit

ANSWER: Journal Date Description Sept. 1 Petty Cash Cash

Post. Ref.

30 Office Supplies Postage Expense Cash Short and Over Cash

Debit Credit 350 350 116 100 4 220

POINTS: DIFFICULTY:

Page 113

Chapter 8 - Internal Control and Cash 182. (a) (b)

Where are cash equivalents disclosed in the financial statements? List three examples of cash equivalents.

(a) Cash account on the balance sheet (b) Money market funds; notes of major corporations (commercial paper); and U.S. Treasury bills POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:15 PM ANSWER:

Page 114

Chapter 8 - Internal Control and Cash 183. You began your new job as the accountant for Morton Company. You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room. The president of the company told you: “Our petty cash system here works quite smoothly. Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day. Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out of petty cash and we debit the amount to Miscellaneous Expense.” Required (a) Should you implement some controls on petty cash? Why? (b) If so, what controls could be used for petty cash? (a)

ANSWER: (b)

Even though the president thinks the petty cash system works well, $2,000 is a tempting sum for theft. Even with only $2,000, if the fund is replenished frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $104,000 ($2,000 × 52 weeks) could be subject to theft. The issue of debiting the amount used to Miscellaneous Expense is a questionable practice that would typically be flagged by the independent auditor. Controls for petty cash include (1) designating one person who is responsible for the fund, (2) maintaining a written record of all payments, (3) requiring support (receipts) for payments from the fund, and (4) periodic review by an independent person of the funds on hand and the payments made by an independent person.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 8:39 AM

Page 115

Chapter 8 - Internal Control and Cash 184. Why would a bank require a company to maintain a compensating balance? ANSWER: POINTS: DIFFICULTY:

Usually a compensating balance is part of a loan agreement or line of credit. 1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-07 - 08-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 8:39 AM 185. Garden Gate, Inc. reported the following data in its August 31 annual report. Cash and cash equivalents Cash flow from operations

$ 485,625 (630,000)

Required (a) What is the company’s “cash burn” per month? (b) What is the company’s ratio of cash to monthly cash expenses? (c) Interpret the ratio you computed in part b. What are the implications for Garden Gate, Inc.? ANSWER:

(a) $630,000/12 = $52,500 per month (b) $485,625/$52,500 = 9.3 months

(c) The ratio of cash to monthly cash expenses means that as of August 31, Garden Gate, Inc. will run out of cash in 9.3 months unless it changes its operations, sells investments, or raises additional financing. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/3/2017 8:38 AM

Page 116

Chapter 8 - Internal Control and Cash 186. The following data are from the Muffin Shoppe for the past four years. Year Ending December 31 Year 1 Year 2 Year 3 Year 4 $38,788 $65,216 $70,691 $78,274 (39,264) (50,580) (45,768) (57,744)

Cash and cash equivalents Cash flow from operations Calculate the following:

Year Ending December 31 Year 1 Year 2 Year 3 Year 4 Monthly cash expenses Ratio of cash to monthly cash expenses ANSWER: Year Ending December 31 Year 1 Year 2 Year 3 Year 4 Monthly cash expenses $3,272 $4,215 $3,814 $4,812 11.85 15.47 18.53 16.27 Ratio of cash to monthly cash expenses months months months months

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.06 - Resource Management ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 9:09 AM DATE MODIFIED: 3/3/2017 8:43 AM

Page 117

Chapter 8 - Internal Control and Cash 187. Farm Store, Inc. reported the following data in its December 31 annual report. Cash and cash equivalents Negative cash flow from operations

$1,050,000 (420,000)

(a) $420,000/12 = $35,000 per month (b) $1,050,000/$35,000 = 30 months

(c) The ratio computed in part b means that as of December 31, Farm Store, Inc. will run out of cash in 2½ years unless it changes its operations, sells investments, or raises additional financing. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 3/3/2017 8:44 AM

Page 118

Chapter 8 - Internal Control and Cash 188. Aspen, Inc. reported the following data in its annual report: Cash and cash equivalents Cash flow from operations

$460,000 (240,000)

Required (1) What is the company’s “cash burn” per month? (2) What is the company’s ratio of cash to monthly cash expenses? ANSWER:

(1) $240,000/12 = $20,000 per month

(2) $460,000/$20,000 = 23 months POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 8:59 AM

Page 119

Chapter 8 - Internal Control and Cash 189. The following data are from Autumn Company for the past four years. Year Ending December 31 Year 1 Year 2 Year 3 Year 4 $23,788 $45,776 $52,899 $82,744 (32,556) (47,880) (32,357) (16,450)

Cash and cash equivalents Cash flow from operations Calculate the following:

Year Ending December 31 Year 1 Year 2 Year 3 Year 4 Monthly cash expenses Ratio of cash to monthly cash expenses ANSWER: Year Ending December 31 Year 1 Year 2 Year 3 Year 4 Monthly cash expenses $2,713 $3,990 $2,696 $1,371 8.8 11.5 19.6 60.4 Ratio of cash to monthly cash expenses months months months months

POINTS: DIFFICULTY:

Page 120

Chapter 8 - Internal Control and Cash 190. Groceries R Us, Inc. reported the following data in its annual report. Cash and cash equivalents Cash flow from operations

$2,280,000 (240,000)

(1) $240,000/12 = $20,000 per month (2) $2,280,000/$20,000 = 114 months

(3) The ratio computed in part b means that Groceries R Us, Inc. will run out of cash in 9.5 years unless it changes operations, sells investments, or raises additional funding. POINTS: 1 DIFFICULTY: Moderate Bloom's: Analyzing QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.08-08 - 08-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:01 PM DATE MODIFIED: 2/21/2017 11:17 PM

Page 121

Chapter 9 - Receivables True / False 1. Notes Receivable and Accounts Receivable can also be called trade receivables. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:02 PM DATE MODIFIED: 2/27/2017 9:41 AM 2. Receivables not currently collectible are reported in the Investments section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 9 - Receivables 3. Trade receivables occur when two companies trade or exchange notes receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:02 PM DATE MODIFIED: 2/21/2017 1:52 PM 4. Other receivables include nontrade receivables such as loans to company officers. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 9 - Receivables 5. Both Accounts Receivable and Notes Receivable represent claims that are expected to be collected in cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:02 PM DATE MODIFIED: 2/21/2017 1:52 PM 6. A company is selling its receivables when it issues its own credit card. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 9 - Receivables 7. Of the two methods of accounting for uncollectible receivables, the allowance method makes use of an estimate of uncollectible receivables. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:02 PM DATE MODIFIED: 2/21/2017 1:52 PM 8. A company may sell its receivables, but it still assumes the risk of uncollectible accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:02 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 4

Chapter 9 - Receivables 9. Small companies can use either the direct write-off method or the allowance method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 10. GAAP requires companies with a large amount of receivables to use the allowance method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 5

Chapter 9 - Receivables 11. The direct write-off method records bad debt expense when an account is determined to be uncollectible. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/27/2017 9:42 AM 12. Generally accepted accounting principles do not normally allow the use of the direct write-off method of accounting for uncollectible accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 9 - Receivables 13. The direct write-off method records bad debt expense in the year the specific account receivable is determined to be uncollectible. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 14. No allowance account is used with the direct write-off method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 7

Chapter 9 - Receivables 15. When using the direct write-off method of accounting for uncollectible receivables, the account Allowance for Doubtful Accounts is debited when a specific account is determined to be uncollectible. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 16. When an account receivable that has been written off is subsequently collected, the account receivable must first be reinstated before recording the receipt of payment. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 8

Chapter 9 - Receivables 17. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 18. Allowance for Doubtful Accounts is a liability account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 9

Chapter 9 - Receivables 19. When using the percent of sales method of estimating uncollectibles, the entry to record bad debt expense includes a credit to Accounts Receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 20. The difference between the balance in Accounts Receivable and the balance in Allowance for Doubtful Accounts is called the net realizable value of the receivables. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 9 - Receivables 21. When the allowance method for accounting for uncollectible receivables is used, net income is reduced when a specific receivable is written off. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 22. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts expense at 1% of credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750. a. True b. False ANSWER: RATIONALE:

False Bad Debt Expense = Credit Sales × Bad Debt as a Percent of Credit Sales = $500,000 × 0.01 = $5,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 STATE STANDARDS: United States - OH - ACBSP: United States - OH - APC-12-Receivables Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 11

Chapter 9 - Receivables 23. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $500. Credit sales for the period total $800,000. If bad debt expense is estimated at 1% of credit sales, the amount of bad debt expense to be recorded in the adjusting entry is $8,500. a. True b. False ANSWER: RATIONALE:

False Bad Debt Expense = Credit Sales × Bad Debt as a Percent of Credit Sales = $800,000 × 0.01 = $8,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 24. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $2,000. The Accounts Receivable balance is analyzed by aging the accounts, and the amount estimated to be uncollectible is $15,000. The amount to be recorded in the adjusting entry for the bad debt expense is $15,000. a. True b. False ANSWER: RATIONALE:

False Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $15,000 − ($2,000) = $17,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 12

Chapter 9 - Receivables 25. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $5,000. The Accounts Receivable balance is analyzed by aging the accounts and the amount estimated to be uncollectible is $50,000. The amount to be recorded in the adjusting entry for the bad debt expense is $45,000. a. True b. False ANSWER: RATIONALE:

True Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $50,000 − $5,000 = $45,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 26. When using the analysis of receivables method for estimating uncollectible receivables, the amount computed in the analysis is usually the amount that would be recorded in the end-of-period adjusting entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 9 - Receivables 27. The balance in Allowance for Doubtful Accounts at the end of the year includes the total of all accounts written off since the beginning of the year. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 28. When accounting for uncollectible receivables and using the percentage of sales method, the matching principle is violated. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 9 - Receivables 29. A primary difference between the direct write-off and allowance methods is whether or not bad debt is based on a percentage of sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 30. The due date of a 60-day note dated July 10 is September 10. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 15

Chapter 9 - Receivables 31. The maturity value of a 12%, 60-day note for $5,000 is $5,600. a. True b. False ANSWER: RATIONALE:

False Maturity Value = Face Value + Interest = $5,000 + [$5,000 × 0.12 × (60/360)] = $5,100 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 32. The maturity value of a note receivable is always the same as its face value. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 9 - Receivables 33. The interest on a 6%, 60-day note for $5,000 is $300. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Interest on 60-Day Note = $5,000 × 0.06 × (60/360) = $50 1 Bloom's: Applying Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 34. The party promising to pay a note at maturity is the maker. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 35. In computing the maturity date of a note, the date the note is issued is included but the due date is omitted. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 36. If a promissory note is dishonored, the payee should still record interest revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 37. The equation for computing interest on an interest-bearing note is as follows: Interest = Maturity Value × Interest Rate × Time. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 38. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 39. When a note is received from a customer on account, it is recorded by debiting Notes Receivable and crediting Accounts Receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 40. When a note is written to settle an open account, no entry is necessary. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 41. The balance of Allowance for Doubtful Accounts is added to Accounts Receivable on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-07 - 09-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 42. Receivables that are expected to be collected in cash in 18 months or less are reported in the Current assets section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-07 - 09-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:01 PM

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Chapter 9 - Receivables 43. The accounts receivable turnover ratio is computed by dividing total gross sales by the average net receivables during the year. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 44. The accounts receivable turnover measures the length of time in days it takes to collect a receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 45. Days’ sales in receivables is an estimate of the length of time the accounts receivable have been outstanding. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Multiple Choice 46. A note receivable due in 18 months is listed on the balance sheet under the caption a. Long-term liabilities b. Fixed assets c. Current assets d. Investments ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 47. The receivable that is usually evidenced by a formal, written instrument of credit is a(n) a. trade receivable b. note receivable c. accounts receivable d. income tax receivable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 48. Which of the following receivables would not be classified as an “other receivable”? a. advance to an employee b. interest receivable c. refundable income tax d. notes receivable ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 49. Other receivables includes all of the following except a. notes receivable b. receivables from employees c. taxes receivable d. interest receivable ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 50. Notes or accounts receivable that result from sales transactions are often called a. nontrade receivables b. trade receivables c. merchandise receivables d. sales receivables ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 51. Which statement is not true? a. Current assets are normally reported in order of their liquidity. b. Disclosures related to receivables are reported in the financial statement notes. c. Cash and cash equivalents are the first items reported under Current assets. d. All receivables that are expected to be realized in cash beyond 265 days are reported in the Noncurrent assets section. ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 52. The term "receivables" includes all a. money claims against other entities b. merchandise to be collected from individuals or companies c. cash to be paid to creditors d. cash to be paid to debtors ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 53. If collection of an other receivable is expected beyond one year, it is classified as a(n) a. other receivable under Noncurrent assets b. other receivable under Current assets c. investment under Current assets d. investment under Noncurrent assets ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 54. An account becomes uncollectible a. when an account receivable is converted into a note receivable b. when a discount is availed on notes receivable c. There is no general rule for when an account becomes uncollectible. d. at the end of the fiscal year ANSWER: POINTS: DIFFICULTY:

c 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:02 PM

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Chapter 9 - Receivables 55. The two methods of accounting for uncollectible receivables are the allowance method and the a. equity method b. direct write-off method c. interest method d. cost method ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 56. The direct write-off method of accounting for uncollectible accounts a. emphasizes balance sheet relationships b. is often used by small companies and companies with few receivables c. emphasizes cash realizable value d. emphasizes the matching of expenses with revenues ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 57. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is recorded a. at the end of each accounting period b. when a credit sale is past due c. whenever a predetermined amount of credit sales has been made d. when an account is determined to be worthless ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 58. An alternative name for Bad Debt Expense is a. Collection Expense b. Credit Loss Expense c. Uncollectible Accounts Expense d. Deadbeat Expense ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 59. Two methods of accounting for uncollectible accounts are the a. direct write-off method and the allowance method b. allowance method and the accrual method c. allowance method and the net realizable method d. direct write-off method and the accrual method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 60. The operating expense recorded from uncollectible receivables can be called all of the following except a. A ccounts Receivable b. Bad Debt Expense c. Doubtful Accounts Expense d. U ncollectible Accounts Expense ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 61. Indications that an account may be uncollectible include all of the following except the customer a. closes its business b. is making small but regular payments c. files for bankruptcy d. cannot be located ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 62. Selling receivables a. shifts some of the risk to the buyer b. delays the receipt of cash c. occurs when an account becomes uncollectible d. results in bad debt expense ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 63. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 64. One of the weaknesses of the direct write-off method is that it a. understates accounts receivable on the balance sheet b. violates the matching principle c. is too difficult to use for many companies d. is based on estimates ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 65. Lowery Co. uses the direct write-off method of accounting for uncollectible accounts receivable. Lowery has a customer whose accounts receivable balance has been determined to likely be uncollectible. The entry to write off this account would be a. debit Allowance for Doubtful Accounts; credit Accounts Receivable b. debit Accounts Receivable; credit Notes Receivable c. debit Bad Debt Expense; credit Allowance for Doubtful Accounts d. debit Bad Debt Expense; credit Accounts Receivable ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:04 PM 66. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Receivable b. Accounts Receivable c. Allowance for Doubtful Accounts d. Bad Debt Expense ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 67. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Allowance for Doubtful Accounts c. Accounts Receivable d. Interest Expense ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 68. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $340,000 and Allowance for Doubtful Accounts has a balance of $51,000. What is the net realizable value of accounts receivable? a. $51,000 b. $289,000 c. $340,000 d. $391,000 ANSWER: RATIONALE:

b Net Realizable Value of Accounts Receivable = Adjusted Accounts Receivable − Allowance for Doubtful Accounts = $340,000 − $51,000 = $289,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 9 - Receivables 69. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 70. On the balance sheet, the amount shown for Allowance for Doubtful Accounts is equal to the a. uncollectible accounts expense for the year b. total of the accounts receivable written off during the year c. total estimated uncollectible accounts as of the end of the year d. sum of all accounts that are past due ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 71. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. contra asset, credit b. asset, debit c. asset, credit d. contra asset, debit ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 72. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when a. a customer's account becomes past due b. an account becomes bad and is written off c. a sale is made d. management estimates the amount of uncollectibles ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 73. A debit balance in Allowance for Doubtful Accounts a. is the normal balance for that account b. indicates that actual bad debt write-offs have been less than what was estimated c. cannot occur if the percentage of receivables method of estimating bad debts is used d. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 74. To record estimated uncollectible receivables using the allowance method, the adjusting entry would be a a. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts b. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable d. debit to Loss on Credit Sales and a credit to Accounts Receivable ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 75. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. liabilities decrease b. net income is unchanged c. total assets are unchanged d. total assets decrease ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 76. Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $390,000 and credit sales are $1,300,000. An aging of accounts receivable shows that approximately 5% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 17,000 Allowance for Doubtful Accounts 17,000 b. Bad Debt Expense 19,500 Allowance for Doubtful Accounts 19,500 c. Bad Debt Expense 22,000 Allowance for Doubtful Accounts 22,000 d. Bad Debt Expense 65,000 Allowance for Doubtful Accounts 65,000 ANSWER: RATIONALE:

a Bad Debt Expense for Year = (Accounts Receivable Balance × Percentage of Estimated Uncollectible Receivables) − Unadjusted Allowance for Doubtful Accounts = ($390,000 × 0.05) − $2,500 = $17,000 Bad Debt Expense 17,000 Allowance for Doubtful Accounts 17,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 77. You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Bad Debt Expense and credit Allowance for Doubtful Accounts b. debit Bad Debt Expense and credit Accounts Receivable c. debit Allowance for Doubtful Accounts and credit Accounts Receivable d. debit Allowance for Doubtful Accounts and credit Bad Debt Expense ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 78. The balance in Allowance for Doubtful Accounts will directly impact the end-of-period adjustment for bad debt expense when using the a. allowance method based on aging the receivables b. direct write-off method c. accrual method d. declining value method ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 79. An aging of a company's accounts receivable indicates that the estimate of uncollectible receivables totals $7,900. If Allowance for Doubtful Accounts has a $700 credit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Bad Debt Expense for $8,600 b. debit to Bad Debt Expense for $7,900 c. debit to Bad Debt Expense for $7,200 d. credit to Allowance for Doubtful Accounts for $700 ANSWER:

RATIONALE:

Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $7,900 − $700 = $7,200 The adjustment to record the bad debt expense for the period will require a debit to Bad Debt Expense for $7,200.

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 80. An aging of a company's accounts receivable indicates that the estimate of uncollectible accounts totals $6,400. If Allowance for Doubtful Accounts has a $1,300 debit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Bad Debt Expense for $7,700 b. debit to Bad Debt Expense for $6,400 c. debit to Bad Debt expense for $5,100 d. credit to Allowance for Doubtful Accounts for $1,300 ANSWER: RATIONALE:

a Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $6,400 − ($1,300) = $7,700 The adjustment to record the bad debt expense for the period will require a debit to Bad Debt Expense for $7,700. POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 81. An aging of a company's accounts receivable indicates that the estimate of the uncollectible accounts totals $4,000. If Allowance for Doubtful Accounts has a $800 credit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Allowance for Doubtful Accounts for $3,200 b. debit to Bad Debt Expense for $3,200 c. debit to Allowance for Doubtful Accounts for $4,000 d. credit to Allowance for Doubtful Accounts for $4,000 ANSWER: RATIONALE:

b Bad Debt Expense = Uncollectible Accounts Estimate – Unadjusted Allowance for Doubtful Accounts = $4,000 – $800 = $3,200 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 82. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase net income in the period it is collected b. will decrease net income in the period it is collected c. does not affect net income in the period it is collected d. requires a correcting entry for the period in which the account was written off ANSWER: RATIONALE: POINTS: DIFFICULTY:

1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 83. Allowance for Doubtful Accounts has a credit balance of $2,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates uncollectible receivables of $19,700. Which of the following entries records the proper adjustment for bad debt expense? a. debit Allowance for Doubtful Accounts, $17,600; credit Bad Debt Expense, $17,600 b. debit Allowance for Doubtful Accounts, $21,800; credit Bad Debt Expense, $21,800 c. debit Bad Debt Expense, $21,800; credit Allowance for Doubtful Accounts, $21,800 d. debit Bad Debt Expense, $17,600; credit Allowance for Doubtful Accounts, $17,600 ANSWER: RATIONALE:

d Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $19,700 − $2,100 = $17,600 Bad Debt Expense 17,600 Allowance for Doubtful Accounts 17,600 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 84. Allowance for Doubtful Accounts has a debit balance of $1,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates uncollectible receivables of $12,900. Which of the following entries records the proper adjustment for bad debt expense? a. debit Bad Debt Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000 b. debit Allowance for Doubtful Accounts, $14,000; credit Bad Debt Expense, $14,000 c. debit Allowance for Doubtful Accounts, $11,800; credit Bad Debt Expense, $11,800 d. debit Bad Debt Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800 ANSWER: RATIONALE:

a Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $12,900 − ($1,100) = $14,000 Bad Debt Expense 14,000 Allowance for Doubtful Accounts 14,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 85. Allowance for Doubtful Accounts has a debit balance of $600 at the end of the year (before adjustment), and an analysis of accounts in the customers ledger indicates uncollectible receivables of $13,000. Which of the following entries records the proper adjusting entry for bad debt expense? a. debit Bad Debt Expense, $600; credit Allowance for Doubtful Accounts, $600 b. debit Bad Debt Expense, $12,400; credit Allowance for Doubtful Accounts, $12,400 c. debit Allowance for Doubtful Accounts, $600; credit Bad Debt Expense, $600 d. debit Bad Debt Expense, $13,600; credit Allowance for Doubtful Accounts, $13,600 ANSWER: RATIONALE:

d Bad Debt Expense = Uncollectible Accounts Estimate – Unadjusted Allowance for Doubtful Accounts = $13,000 – ($600) = $13,600 Bad Debt Expense 13,600 Allowance for Doubtful Accounts 13,600 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 86. At the beginning of the year, the balance in Allowance for Doubtful Accounts is a credit of $760. During the year, previously written off accounts of $120 are reinstated and accounts totaling $740 are written off as uncollectible. The end-of-year balance (before adjustment) in Allowance for Doubtful Accounts should be a. $760 b. $120 c. $140 d. $740 ANSWER:

RATIONALE:

End-of-Year Balance of Allowance for Doubtful Accounts = Beginning Allowance for Doubtful Accounts + Previously Written Off Accounts Reinstated − Accounts Written Off as Uncollectibles = $760 + $120 − $740 = $140

POINTS: DIFFICULTY:

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Chapter 9 - Receivables 87. Jefferson uses the percent of sales method of estimating uncollectible expenses. Based on past history, 2% of credit sales are expected to be uncollectible. Sales for the current year are $5,550,000. Which of the following is correct? a. Uncollectible accounts are estimated to be $55,500. b. Uncollectible accounts are estimated to be $111,000. c. Bad debt expense is estimated to be $5,550. d. Bad debt expense is estimated to be $11,100. ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Uncollectible Accounts = $5,550,000 × 0.02 = $111,000 1 Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 88. Jefferson uses the percent of sales method of estimating uncollectible expenses. Based on past history, 2% of credit sales are expected to be uncollectible. Sales for the current year are $5,550,000. Which of the following is correct regarding the entry to record estimated uncollectible receivables? a. Cash will be debited. b. Bad Debt Expense will be credited. c. Allowance for Doubtful Accounts will be credited. d. Accounts Receivable will be debited. ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 89. Miles uses the allowance method and wrote off the account of James. Miles then received $559 as partial payment on the account of James. The journal entry to record the initial write-off includes a a. debit to Allowance for Doubtful Accounts b. credit to Cash c. debit to Accounts Receivable—James d. credit to Bad Debt Expense ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 90. Using the allowance method of accounting for uncollectible receivables, the entry to reinstate a specific receivable previously written off would include a a. credit to Bad Debt Expense b. credit to Accounts Receivable c. debit to Allowance for Doubtful Accounts d. debit to Accounts Receivable ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 91. Dalton Company uses the allowance method to account for uncollectible receivables. Dalton has determined that the Irish Company account is uncollectible. To write off this account, Dalton should debit a. Bad Debt Expense and credit Accounts Receivable b. Bad Debt Expense and credit Allowance for Doubtful Accounts c. Allowance for Doubtful Accounts and credit Accounts Receivable d. Accounts Receivable and credit Allowance for Doubtful Accounts ANSWER: POINTS: DIFFICULTY:

c 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 92. In accounting for uncollectible receivables, the balance in Allowance for Doubtful Accounts will directly impact the amount of the adjustment when applying a. the direct write-off method b. the percentage of sales method c. the analysis of receivables method d. both the percentage of sales and analysis of receivables methods ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 93. Abbott Company uses the allowance method of accounting for uncollectible accounts. Abbott estimates that 3% of credit sales will be uncollectible. On January 1, Allowance for Doubtful Accounts had a credit balance of $2,400. During the year, Abbott wrote off accounts receivable totaling $1,800 and made credit sales of $100,000. There were no sales returns during the year. After the adjusting entry, the December 31 balance in Bad Debt Expense will be a. $1,200 b. $3,000 c. $3,600 d. $7,200 ANSWER: RATIONALE:

b Bad Debt Expense = Credit Sales × Bad Debt as a Percent of Credit Sales = $100,000 × 0.03 = $3,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 94. A company uses the allowance method to account for uncollectible accounts receivable. When the firm writes off a specific customer's account receivable, a. total current assets are reduced b. total expenses for the period are increased c. the net realizable value of accounts receivable increases d. there is no effect on total current assets or total expenses ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 95. Allowance for Doubtful Accounts has a credit balance of $1,300 at the end of the year (before adjustment). The company prepares an analysis of customers' accounts to estimate the amount of uncollectible accounts of $41,900. Which of the following adjusting entries would be made to record the bad debt expense for the year? a. debit Allowance for Doubtful Accounts, $40,600; credit Bad Debt Expense, $40,600 b. debit Allowance for Doubtful Accounts, $43,200; credit Bad Debt Expense, $43,200 c. debit Bad Debt Expense, $43,200; credit Allowance for Doubtful Accounts, $43,200 d. debit Bad Debt Expense, $40,600; credit Allowance for Doubtful Accounts, $40,600 ANSWER: RATIONALE:

d Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $41,900 − $1,300 = $40,600 Bad Debt Expense 40,600 Allowance for Doubtful Accounts 40,600 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 96. Allowance for Doubtful Accounts has a debit balance of $2,300 at the end of the year (before adjustment). The company prepares an analysis of customers' accounts and estimates the amount of uncollectible accounts to be $31,900. Which of the following adjusting entries is needed to record the bad debt expense for the year? a. debit Bad Debt Expense, $34,200; credit Allowance for Doubtful Accounts, $34,200 b. debit Allowance for Doubtful Accounts, $34,200; credit Bad Debt Expense, $34,200 c. debit Allowance for Doubtful Accounts, $29,600; credit Bad Debt Expense, $29,600 d. debit Bad Debt Expense, $29,600; credit Allowance for Doubtful Accounts, $29,600 ANSWER: RATIONALE:

a Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $31,900 − ($2,300) = $34,200 Bad Debt Expense 34,200 Allowance for Doubtful Accounts 34,200 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 97. Allowance for Doubtful Accounts has a debit balance of $2,500 at the end of the year (before adjustment), and bad debt expense is estimated at 4% of credit sales. If credit sales are $800,000, the amount of the adjusting entry to record the estimate of the uncollectible accounts a. is $29,500 b. is $34,500 c. is $32,000 d. cannot be determined ANSWER: RATIONALE:

c Uncollectible Accounts Estimate = Credit Sales × Bad Debts as a Percent of Credit Sales = $800,000 × 0.04 = $32,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 98. Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment), and an analysis of accounts in the customer ledger indicates that the estimated amount of uncollectible accounts should be $16,000. Based on the estimate above, which of the following adjusting entries should be made? a. debit Bad Debt Expense, $800; credit Allowance for Doubtful Accounts, $800 b. debit Bad Debt Expense, $15,200; credit Allowance for Doubtful Accounts, $15,200 c. debit Allowance for Doubtful Accounts, $800; credit Bad Debt Expense, $800 d. debit Bad Debt Expense, $16,800; credit Allowance for Doubtful Accounts, $16,800 ANSWER: RATIONALE:

b Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $16,000 − $800 = $15,200 Bad Debt Expense 15,200 Allowance for Doubtful Accounts 15,200 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 99. The allowance method of estimating uncollectible accounts receivable based on an analysis of receivables shows that $640 of accounts receivable are uncollectible. Allowance for Doubtful Accounts has a debit balance of $110. The adjusting entry at the end of the year will include a credit to Allowance for Doubtful Accounts in the amount of a. $110 b. $640 c. $530 d. $750 ANSWER: RATIONALE:

d Credit to Allowance for Doubtful Accounts = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $640 − ($110) = $750 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:06 PM

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Chapter 9 - Receivables 100. Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and bad debt expense is estimated at 3% of credit sales. If credit sales are $300,000, the amount of the adjusting entry to record the estimated uncollectible accounts receivable a. is $8,500 b. is $9,500 c. is $9,000 d. cannot be determined ANSWER: RATIONALE:

c Uncollectible Accounts Estimate = Credit Sales × Bad Debt as a Percent of Credit Sales = $300,000 × 0.03 = $9,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 101. Allowance for Doubtful Accounts is classified as a(n) ______ account and has a normal ______ balance. a. owner's equity, credit b. contra asset, debit c. owner's equity, debit d. contra asset, credit ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 102. Under the allowance method of accounting for uncollectible receivables, writing off an uncollectible account a. affects only income statement accounts b. is not an acceptable practice c. affects only balance sheet accounts d. affects both balance sheet and income statement accounts ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 103. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts, respectively. a. $19,500 and $25,000 b. $30,500 and $525,000 c. $19,500 and $525,000 d. $30,500 and $25,000 ANSWER: RATIONALE:

a Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $25,000 − $5,500 = $19,500 Allowance for Doubtful Accounts = Unadjusted Allowance for Doubtful Accounts + Bad Debt Expense = $5,500 + $19,500 = $25,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:08 PM

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Chapter 9 - Receivables 104. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine the net realizable value of accounts receivable after adjustment. (Hint: Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts.) a. $550,000 b. $544,500 c. $525,000 d. $575,000 ANSWER: RATIONALE:

c Bad Debt Expense = Uncollectible Accounts Estimate − Unadjusted Allowance for Doubtful Accounts = $25,000 − $5,500 = $19,500 Adjusted Allowance for Doubtful Accounts = Unadjusted Allowance for Doubtful Accounts + Bad Debt Expense = $5,500 + $19,500 = $25,000 Net Realizable Value of Accounts Receivable = Accounts Receivable − Allowance for Doubtful Accounts = $550,000 − $25,000 = $525,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 105. When comparing the direct write-off method and the allowance method of accounting for uncollectible receivables, a major difference is that the direct write-off method a. uses a percentage of sales to estimate uncollectible accounts b. is used primarily by large companies with many receivables c. is used primarily by small companies with few receivables d. uses an allowance account ANSWER: POINTS: DIFFICULTY:

c 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 106. When a company uses the allowance method of accounting for uncollectible receivables, which entry would not be found in the general journal? a. Bad Debt Expense 500 Allowance for Doubtful Accounts 500 b. Bad Debt Expense 500 Accounts Receivable—Bob Smith 500 c. Cash 300 Allowance for Doubtful Accounts 200 Accounts Receivable—Bob Smith 500 d. Cash 500 Accounts Receivable—Bob Smith 500 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 9 - Receivables 107. When a company uses the allowance method of accounting for uncollectible receivables, the entry to reinstate a previously written off account would include a a. credit to Bad Debt Expense b. debit to Bad Debt Expense c. debit to Allowance for Doubtful Accounts d. credit to Allowance for Doubtful Accounts ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 108. The amount for which a promissory note is written is called the a. realizable value b. maturity value c. face value d. proceeds ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 109. The amount of the promissory note plus the interest earned on the due date is called the a. interest value b. maturity value c. face value d. issuance value ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 110. A 60-day, 12% note for $7,000, dated April 15, is received from a customer on account. The face value of the note is a. $6,860 b. $7,140 c. $7,840 d. $7,000 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 111. A 60-day, 9% note for $10,000, dated May 1, is received from a customer on account. The maturity value of the note is a. $10,000 b. $10,150 c. $10,900 d. $9,100 ANSWER: RATIONALE:

b Maturity Value = Face Value + Interest = $10,000 + [$10,000 × 0.09 × (60/360)] = $10,150 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 112. Interest on a note can be calculated without knowledge of the a. fair value of the note b. rate of interest c. note duration d. principal amount ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 113. On October 1, Black Company receives a 9% interest-bearing note from Reese Company to settle a $20,000 account receivable. The note is due in six months. At December 31, Black should record interest revenue of a. $0 b. $450 c. $900 d. $1,800 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Interest Revenue = $20,000 × 0.09 × (3/12) = $450 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 114. If the maker of a promissory note fails to pay the note on the due date, the note is said to be a. displaced b. disallowed c. dishonored d. discounted ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 115. The journal entry to record a note received from a customer to replace an account is a. debit Notes Receivable; credit Accounts Receivable b. debit Accounts Receivable; credit Notes Receivable c. debit Cash; credit Notes Receivable d. debit Notes Receivable; credit Notes Payable ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 116. A $6,000, 60-day, 12% note recorded on November 21 is not paid by the maker at maturity. The journal entry to recognize this event is a. debit Cash, $6,120; credit Notes Receivable, $6,120 b. debit Accounts Receivable, $6,120; credit Notes Receivable, $6,000; credit Interest Receivable, $120 c. debit Notes Receivable, $6,060; credit Accounts Receivable, $6,060 d. debit Accounts Receivable, $6,120; credit Notes Receivable, $6,000; credit Interest Revenue, $120 ANSWER: RATIONALE:

d Interest = $6,000 × 0.12 × (60/360) = $120 Accounts Receivable 6,120 Notes Receivable 6,000 Interest Revenue 120 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 9 - Receivables 117. When referring to a note receivable or promissory note, a. the maker is the party to whom the money is due b. the note is not considered a formal credit instrument c. the note cannot be factored to another party d. the note may be used to settle an accounts receivable ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 118. When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note b. debit Notes Receivable for the face value of the note c. credit Notes Receivable for the maturity value of the note d. credit Notes Receivable for the face value of the note ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 119. Paper Company receives a $6,000, three-month, 6% promissory note from Dame Company in settlement of an open accounts receivable. What entry will Paper Company make upon receiving the note? a. Notes Receivable, Dame Company 6,000 Accounts Receivable, Dame Company 6,000 b. Notes Receivable, Dame Company 6,090 Accounts Receivable, Dame Company 6,090 c. Notes Receivable, Dame Company 6,090 Accounts Receivable, Dame Company 6,000 Interest Revenue 90 d. Notes Receivable, Dame Company 6,000 Interest Revenue 90 Accounts Receivable, Dame Company 6,000 Interest Receivable 90 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 120. The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is a. $40,000 b. $40,400 c. $43,600 d. $44,000 ANSWER: RATIONALE:

b Maturity Value = Face Value + Interest = $40,000 + [$40,000 × 0.09 × (40/360)] = $40,400 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 121. Harper Company lends Hewell Company $40,000 on March 1, accepting a four-month, 6% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared? a. Cash 200 Interest Revenue 200 b. Interest Receivable 800 Interest Revenue 800 c. Interest Receivable 200 Interest Revenue 200 d. Notes Receivable 40,000 Cash 40,000 ANSWER: RATIONALE:

c Interest = $40,000 × 0.06 × (1/12) = $200 Interest Receivable 200 Interest Revenue 200 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 122. On August 1, Kim Company accepted a 90-day note receivable as payment for services provided to Hsu Company. The terms of the note were $20,000 face value and 6% interest. On October 30, the journal entry to record the collection of the note should include a a. credit to Notes Receivable for $20,300 b. debit to Interest Receivable for $300 c. credit to Interest Revenue for $300 d. debit to Notes Receivable for $20,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Interest Revenue to Be Credited = $20,000 × 0.06 × (90/360) = $300 1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 123. Current assets are usually listed in order a. of the due date b. of the size c. alphabetically d. of liquidity ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-07 - 09-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 124. The accounts receivable turnover measures a. how frequently during the year the accounts receivable are converted to cash b. the number of days of accounts receivable outstanding c. the fair market value of accounts receivable d. the efficiency of the accounts payable function ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 125. Days' sales in receivables a. is an estimate of the length of time the receivables have been outstanding b. measures the number of times the receivables turn over each year c. is credit sales divided by average receivables d. is not meaningful and therefore is not used ANSWER: POINTS: DIFFICULTY:

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Chapter 9 - Receivables 126. Given the following information, compute accounts receivable turnover.

Gross sales

$150,000 Accounts receivable, beginning of year

$18,000

Sales a. 6.75 b. 7.50 c. 6.13 d. 6.82

135,000 Accounts receivable, end of year

22,000

ANSWER: RATIONALE:

a Accounts Receivable Turnover = Sales/Average Accounts Receivable = $135,000/($18,000 + $22,000) = 6.75 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Matching Match each description to the appropriate term (a–i). a. Accounts receivable turnover b. Net realizable value c. Accounts receivable d. Aging the receivables e. Receivables f. Direct write-off method g. Allowance for doubtful accounts h. Bad debt expense i. Notes receivable DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

Easy Bloom's: Remembering Matching False ACCT.WARD.18.09-01 - 09-01 ACCT.WARD.18.09-02 - 09-02

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Chapter 9 - Receivables ACCT.WARD.18.09-03 - 09-03 ACCT.WARD.18.09-04 - 09-04 ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 127. A receivable created from selling merchandise or services on account ANSWER: c POINTS: 1 128. The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age ANSWER: d POINTS: 1 129. A contra asset that represents the amount of estimated uncollectible receivables ANSWER: g POINTS: 1 130. Records bad debt expense only when a specific customer’s account is deemed worthless ANSWER: f POINTS: 1 131. Operating expense recorded as a result of receivables becoming uncollectible ANSWER: h POINTS: 1 132. The difference between accounts receivable and allowance for doubtful accounts ANSWER: b POINTS: 1 133. Amounts owed by customers documented by a formal written instrument of credit ANSWER: i POINTS: 1 134. All money claims against other entities ANSWER: e POINTS: 1 135. Measures how frequently during the year accounts receivable are being turned into cash ANSWER: a POINTS: 1

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Chapter 9 - Receivables Match each description to the appropriate term (a–d). Each term may be used more than once. a. Direct write-off method b. Aging of receivables method c. Percent of sales method d. Allowance method DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCT.WARD.18.09-04 - 09-04 ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 136. This method records bad debts when specific accounts are deemed uncollectible. ANSWER: a POINTS: 1 137. When using this method, estimated bad debts are added to the existing allowance balance. ANSWER: c POINTS: 1 138. This method is most often used by small companies with few receivables. ANSWER: a POINTS: 1 139. This method is based on the theory that older accounts are less likely to be collected. ANSWER: b POINTS: 1 140. This method focuses on the balance sheet. ANSWER: b POINTS: 1 141. This method estimates the uncollectible accounts receivable at the end of the accounting period. ANSWER: d POINTS: 1 142. With this method, there is no allowance account. ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 9 - Receivables 143. This method focuses on the income statement. ANSWER: c POINTS: 1 Match each description to the appropriate term (a–h). a. Face amount b. Term c. Interest d. Maturity value e. Dishonored note f. Maker g. Notes receivable h. Interest rate DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 144. A formal, written instrument of credit that represents amounts due from customers ANSWER: g POINTS: 1 145. The amount due that must be paid at the due date of a note receivable ANSWER: d POINTS: 1 146. The amount charged for using the money of another party ANSWER: c POINTS: 1 147. The stated rate charged for using the money of another party ANSWER: h POINTS: 1 148. A note that is not paid when it is due ANSWER: e POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 9 - Receivables 149. The dollar amount stated on a promissory note ANSWER: a POINTS: 1 150. The party promising to pay a note ANSWER: f POINTS: 1 151. The time between the date a note is issued and the due date of the note ANSWER: b POINTS: 1 Subjective Short Answer 152. Other than Accounts Receivable and Notes Receivable, name other receivables that might be included in the general ledger. ANSWER: POINTS: DIFFICULTY:

Interest Receivable, Receivables from Officers or Employees, Taxes Receivable 1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 153. Discuss the similarities and differences between accounts receivable, notes receivable, and other receivables. ANSWER:

Accounts receivable result from the sale of goods and services on credit. They are normally collected within a short period of time (30–60 days) and are classified as Current assets on the balance sheet. Notes receivable can also result from the sale of goods, generally when the amount owed is due in more than 60 days. Notes can also be used to settle accounts receivable. Notes are formal written instruments of credit. When collection is expected to be in less than one year, they are classified as Current assets on the balance sheet.

Other receivables result from non-trade transactions (interest, taxes, amounts due from employees). They are generally reported separately on the balance sheet. If collection is expected in less than one year, they are classified as Current assets. If not, they are classified as Investments. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-01 - 09-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 154. List at least three indicators that a receivable may be uncollectible. ANSWER:

Answers may vary and should include three of the following: 1. The receivable is past due. 2. The customer does not respond to the company’s attempts to collect. 3. The customer files for bankruptcy. 4. The customer closes its business. 5. The company cannot locate the customer. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 155. Discuss the two methods for recording bad debt expense. What type of company uses each method? ANSWER:

The first method is the direct write-off method. Under this method, bad debt expense is recorded only when an account is deemed uncollectible. This method is most often used by small companies and those with few receivables.

The second method is the allowance method. Under this method, bad debt expense is recorded by estimating bad debts at the end of the accounting period. Companies that have a large amount of receivables are required to use this method under generally accepted accounting principles (GAAP). POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-02 - 09-02 ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 156. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. Apr. 1 Sold merchandise on account to Jim Dobbs, $7,200. The cost of the merchandise is $5,400. June 10 Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder. Oct. 11 Reinstated the account of Jim Dobbs and received cash in full payment. ANSWER: Apr. 1

Accounts Receivable Sales

7,200

Cost of Merchandise Sold Merchandise Inventory

5,400

Cash Bad Debt Expense Accounts Receivable—Jim Dobbs

2,400 4,800

Accounts Receivable—Jim Dobbs Bad Debt Expense

4,800

Cash Accounts Receivable—Jim Dobbs

4,800

7,200

June 10

Oct. 11

5,400

7,200

4,800

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 157. Stephanie Roe utilizes the direct write-off method of accounting for uncollectible receivables. On September 15, she is notified by the attorneys for Jacob Marley that Jacob Marley is bankrupt and no cash is expected in the liquidation of Jacob Marley. Write off the $675 of accounts receivable due from Jacob Marley. ANSWER:

Sept. 15 Bad Debt Expense 675 Accounts Receivable—Jacob Marley POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

675

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Chapter 9 - Receivables 158. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. Feb. 20 Received $1,000 from Andrew Warren and wrote off the remainder owed of $4,000 as uncollectible. May 10 Reinstated the account of Andrew Warren and received $4,000 cash in full payment. ANSWER:

Feb.

Cash

1,000

Bad Debt Expense

4,000

Accounts Receivable—Andrew Warren May

Accounts Receivable—Andrew Warren

5,000 4,000

Bad Debt Expense 10

Cash Accounts Receivable—Andrew Warren

4,000 4,000 4,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 159. The following journal entries would be used in one of the two methods of accounting for uncollectible receivables. Identify each. (a) Bad Debt Expense Accounts Receivable—Billings (b) Allowance for Doubtful Accounts Accounts Receivable—Grover ANSWER:

(a) (b)

900 900 900 900 Direct write-off method Allowance method

POINTS: DIFFICULTY:

1 Bloom's: Understanding Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 160. Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases and indicate the ending balance in each case. (a) (b)

Credit balance of $300 in Allowance for Doubtful Accounts just prior to adjustment. Analysis of Accounts Receivable indicates uncollectible receivables of $8,500. Credit balance of $500 in Allowance for Doubtful Accounts just prior to adjustment. Uncollectible receivables are estimated at 2% of credit sales, which totaled $1,000,000 for the year.

ANSWER:

(a) (b)

Amount added: $8,200 Ending balance: $8,500 Amount added: $20,000 Ending balance: $20,500

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 161. Journalize the following transactions using the allowance method of accounting for uncollectible receivables. Apr. 1 Sold merchandise on account to Jim Dobbs, $7,200. The cost of the merchandise is $5,400. June 10 Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder. Oct. 11 Reinstated the account of Jim Dobbs and received cash in full payment. ANSWER: Apr. 1

June 10

Oct. 11

Accounts Receivable Sales

7,200

Cost of Merchandise Sold Merchandise Inventory

5,400

Cash Allowance for Doubtful Accounts Accounts Receivable—Jim Dobbs

2,400 4,800

Accounts Receivable—Jim Dobbs Allowance for Doubtful Accounts

4,800

Cash Accounts Receivable—Jim Dobbs

4,800

7,200

5,400

7,200

4,800

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

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Chapter 9 - Receivables 162. At the end of the current year, Accounts Receivable has a balance of $700,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANSWER:

(a)

$17,500 ($3,500,000 × 0.005)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $17,500) Bad Debt Expense

(c)

Net realizable value ($700,000 – $23,000)

Adjusted Balance $700,000 23,000 17,500 $677,000

POINTS: DIFFICULTY:

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Chapter 9 - Receivables 163. At the end of the current year, Accounts Receivable has a balance of $750,000; Allowance for Doubtful Accounts has a debit balance of $6,200; and sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANSWER:

(a)

$17,500 ($3,500,000 × 0.005)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($17,500 – $6,200) Bad Debt Expense

(c)

Net realizable value ($750,000 – $11,300)

Adjusted Balances $750,000 11,300 17,500 $738,700

POINTS: DIFFICULTY:

Page 87

Chapter 9 - Receivables 164. At the end of the current year, Accounts Receivable has a balance of $90,000; Allowance for Doubtful Accounts has a credit balance of $850; and sales for the year total $300,000. Bad debt expense is estimated at 2.5% of sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANSWER:

(a)

$7,500 ($300,000 × 0.025)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($850 + $7,500) Bad Debt Expense

(c)

Net realizable value ($90,000 – $8,350)

Adjusted Balance $90,000 8,350 7,500 $81,650

POINTS: DIFFICULTY:

Page 88

Chapter 9 - Receivables 165. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANSWER:

(a)

$19,500 ($25,000 – $5,500)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $19,500) Bad Debt Expense

(c)

Net realizable value ($550,000 – $25,000)

Adjusted Balance $550,000 25,000 19,500 $525,000

POINTS: DIFFICULTY:

Page 89

Chapter 9 - Receivables 166. At the end of the current year, Accounts Receivable has a balance of $675,000; Allowance for Doubtful Accounts has a debit balance of $5,400; and sales for the year total $3,000,000. An analysis of receivables indicates the uncollectible receivables are estimated to be $45,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. ANSWER:

(a)

$50,400 ($45,000 + $5,400)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($50,400 – $5,400) Bad Debt Expense

(c)

Net realizable value ($675,000 – $45,000)

Adjusted Balance $675,000 45,000 50,400 $630,000

POINTS: DIFFICULTY:

Page 90

Chapter 9 - Receivables 167. Discount Mart utilizes the allowance method of accounting for uncollectible receivables. On December 12, the company receives a $550 check from Chad Thomas in settlement of Thomas’s $1,100 outstanding accounts receivable. Due to Thomas’s failing health, he is closing his company and is expecting to make no further payments to Discount Mart. Journalize this transaction. ANSWER:

Dec. 12 Cash Allowance for Doubtful Accounts Accounts Receivable—Chad Thomas

550 550 1,100

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 168. On June 30 (the end of the period), Brown Company has a credit balance of $2,275 in Allowance for Doubtful Accounts. An evaluation of accounts receivable indicates that the proper balance should be $30,025. Journalize the appropriate adjusting entry. ANSWER:

June 30 Bad Debt Expense 27,750* Allowance for Doubtful Accounts

27,750

*$30,025 – $2,275 = $27,750 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 169. (a) The aging of Torme Designs' accounts receivable is shown below. Calculate the amount of each periodicity range that is deemed to be uncollectible.

Age Interval

Balance

Estimated Uncollectible Accounts Percentage Amount Page 91

Chapter 9 - Receivables Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total

$850,000 47,500 21,750 11,250 5,065 2,500 1,145 $939,210

3.50% 5.00 10.00 20.00 30.00 50.00 95.00

(b) If Allowance for Doubtful Accounts has a credit balance of $1,135.00, record the adjusting entry for the bad debt expense for the year. (a) ANSWER: Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total:

Estimated Uncollectible Accounts Balance Percentage Amount $850,000 3.50% $29,750.00 47,500 5.00 2,375.00 21,750 10.00 2,175.00 11,250 20.00 2,250.00 5,065 30.00 1,519.50 2,500 50.00 1,250.00 1,145 95.00 1,087.75 $939,210 $40,407.25

(b) Dec. 31 Bad Debt Expense Allowance for Doubtful Accounts

39,272.25 39,272.25

Calculation of expense: Amount of calculated uncollectible accounts $40,407.25 Less credit balance of account 1,135.00 Bad debt expense $39,272.25

POINTS: DIFFICULTY:

Page 92

Chapter 9 - Receivables DATE CREATED: DATE MODIFIED:

1/16/2017 4:03 PM 2/21/2017 1:52 PM

170. For each of the following scenarios, indicate the amount of the adjusting journal entry for Bad Debt Expense to be recorded, the balance in Allowance for Doubtful Accounts after adjustment at December 31, and the net realizable value of accounts receivable at December 31. (a) Based on an analysis of Simmons Company’s $380,000 balance in Accounts Receivable at December 31, it was estimated that $15,500 will be uncollectible. There is a credit balance of $1,200 in Allowance for Doubtful Accounts before adjustment. (b) Blake Company had credit sales of $900,000 at year-end, an Accounts Receivable balance of $425,000 at December 31, and an Allowance for Doubtful Accounts credit balance of $11,000 before adjustment. Blake estimates bad debt expense as ¾ of 1% of credit sales. (c) Hidgon Inc. has a balance of $812,000 in Accounts Receivable at December 31. An analysis of those receivables shows $24,000 will probably not be collected. Before adjusting entries are prepared, Allowance for Doubtful Accounts has a debit balance of $750. ANSWER:

(a) Bad debt expense Allowance for doubtful accounts at Dec. 31 Net realizable value of accounts receivable at Dec. 31

$ 14,300 15,500 364,500

(b) Bad debt expense Allowance for doubtful accounts at Dec. 31 Net realizable value of accounts receivable at Dec. 31

$ 6,750 17,750

(c) Bad debt expense Allowance for doubtful accounts at Dec. 31 Net realizable value of accounts receivable at Dec. 31 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

$ 24,750 24,000

407,250

788,000

171. A partially completed aging of receivables schedule for Lindy Designs is shown below. Calculate the amount that is estimated to be uncollectible.

Page 93

Chapter 9 - Receivables (a) Determine the amount estimated to be uncollectible by completing the aging of receivables schedule. Round calculations to the nearest dollar. Estimated Uncollectible Accounts Age Interval Balance Percentage Amount Not past due $550,000 2.50% 1–30 days past due 96,500 4.00 31–60 days past due 43,750 9.50 61–90 days past due 22,250 16.00 91–180 days past due 5,600 31.00 181–365 days past due 3,100 60.00 Over 365 days past due 1,250 95.00 $722,450 Total (b) If Allowance for Doubtful Accounts has a credit balance of $9,700, record the adjusting entry for bad debt expense for the year. (c) If Allowance for Doubtful Accounts has a debit balance of $9,700, record the adjusting entry for bad debt expense for the year. ANSWER:

(a)

Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total (b) Dec. 31

Balance $550,000 96,500 43,750 22,250 5,600 3,100 1,250 $722,450

Estimated Uncollectible Accounts Percentage Amount 2.50% $13,750 4.00 3,860 9.50 4,156 16.00 3,560 31.00 1,736 60.00 1,860 95.00 1,188 $30,110

Bad Debt Expense Allowance for Doubtful Accounts

20,410 20,410

Calculation of expense: Amount of calculated uncollectible accounts Less credit balance of account Bad debt expense

$30,110 9,700 $20,410

Bad Debt Expense Allowance for Doubtful Accounts

39,810

Calculation of expense: Amount of calculated uncollectible accounts Plus debit balance of account Bad debt expense Copyright Cengage Learning. Powered by Cognero.

$30,110 9,700 $39,810 Page 94

Chapter 9 - Receivables

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:15 PM 172. Discuss the (a) focus and (b) financial statement emphasis of the percent of sales and the analysis of receivables methods of estimating bad debts. ANSWER:

(a) Bad debt expense is the focus of the percent of sales method. It places more emphasis on matching revenues and expenses and thus emphasizes the income statement.

(b) The allowance for doubtful accounts is the focus of the analysis of receivables method. It places more emphasis on the net realizable value of receivables and thus emphasizes the balance sheet. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 173. Morry Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31: Customer J. Jackson L. Stanton C. Barton S. Fenton Total

Amount $10,000 9,500 13,100 2,400 $35,000

Page 95

Chapter 9 - Receivables Required (a)

Journalize the write-offs for the current year under the direct write-off method.

(b)

Journalize the write-offs for the current year under the allowance method. Also, journalize the adjusting entry for uncollectible receivables assuming the company made $2,400,000 of credit sales during the year and the industry average for uncollectible receivables is 1.5% of credit sales.

(c)

How much higher or lower would Morry Company’s net income have been under the direct write-off method than under the allowance method?

ANSWER:

(a) Bad Debt Expense Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton

35,000

(b) Allowance for Doubtful Accounts Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton

35,000

10,000 9,500 13,100 2,400

Bad Debt Expense 36,000 Allowance for Doubtful Accounts 36,000 Uncollectible accounts estimate. ($2,400,000 × 1.5% = $36,000) (c) Net income would have been $1,000 higher under the direct write-off method, because bad debt expense is $1,000 higher under the allowance method ($36,000 expense under the allowance method vs. $35,000 expense under the direct write-off method). POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM Copyright Cengage Learning. Powered by Cognero.

Page 96

Chapter 9 - Receivables 174. Fellows Corporation has determined that the $2,700 accounts receivable due from Andrew Stevens is uncollectible. Compare the journal entry that is required under the direct write-off method to the journal entry that is required using the allowance method. ANSWER:

Under the direct write-off method, Bad Debt Expense will be debited for $2,700. Under the allowance method, the debit will be made to Allowance for Doubtful Accounts. Under both methods, Accounts Receivable—Andrew Stevens will be credited for $2,700. POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 175. For a business that uses the allowance method of accounting for uncollectible receivables: (a) Journalize the entries to record the following: (1)

(2) (3) (4)

Record the adjusting entry at December 31, the end of the first fiscal year, to record the bad debt expense. The accounts receivable account has a balance of $800,000, and the contra asset account before adjustment has a debit balance of $600. Analysis of the receivables indicates uncollectible receivables of $18,000. In March of the next year, the $350 owed by Fronk Co. on account is written off as uncollectible. In November of the next year, $200 of the Fronk Co. account is reinstated and payment of that amount is received. In December of the next year, $400 is received on the $600 owed by Dodger Co. and the remainder is written off as uncollectible.

(b) Redo the entries in steps (2), (3), and (4) assuming the company uses the direct write-off method.

ANSWER:

(a)

(1) Bad Debt Expense Allowance for Doubtful Accounts

18,600

(2) Allowance for Doubtful Accounts Accounts Receivable—Fronk Co.

350

(3) Accounts Receivable—Fronk Co. Allowance for Doubtful Accounts

200

18,600

350

200 Page 97

Chapter 9 - Receivables Cash Accounts Receivable—Fronk Co.

200

(4) Cash Allowance for Doubtful Accounts Accounts Receivable—Dodger Co.

400 200

(2) Bad Debt Expense Accounts Receivable—Fronk Co.

350

(3) Accounts Receivable—Fronk Co. Bad Debt Expense

200

600

(b) 350

200

Cash Accounts Receivable—Fronk Co.

200

(4) Cash Bad Debt Expense Accounts Receivable—Dodger Co.

400 200

200

600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-03 - 09-03 ACCT.WARD.18.09-04 - 09-04 ACCT.WARD.18.09-05 - 09-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 98

Chapter 9 - Receivables 176. Sunshine Service Center received a 120-day, 6% note for $40,000, dated April 12 from a customer on account. (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry to record the receipt of the payment of the note at maturity. ANSWER:

(a) August 10 determined as follows: April May June July August Total

18 days (30–12) days 31 days 30 days 31 days 10 days 120 days

(b) $40,800 {$40,000 + [$40,000 × 6% × (120/360)]} (c) Aug. 10

Cash Notes Receivable Interest Revenue

40,800 40,000 800

POINTS: DIFFICULTY:

Page 99

Chapter 9 - Receivables 177. Fill in the blanks related to the characteristics of a promissory note. 1. The party promising to pay the note is called the ________. 2.

The amount for which the note is written is called the _______ amount.

The date the note is to be paid is the _______ date.

The time between the date when a note is written and the time it must be paid is called the _____ of the note.

ANSWER:

1. maker 2. face 3. maturity or due 4. term POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 178. Determine the due date and amount of interest due at maturity on the following notes:

(a) (b)

Origination Date Mar. 15 May 1

Face Amount $8,000 12,000

Term of Note 60 days 90 days

Interest Rate 9% 8%

Maturity Date _______ _______

Interest Amount _______ _______

(a) May 14; $120 ($8,000 × 0.09 × 60/360) (b) July 30; $240 ($12,000 × 0.08 × 90/360) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:17 PM ANSWER:

Page 100

Chapter 9 - Receivables 179. Blackwell Industries received a 120-day, 9% note for $180,000, dated August 10 from a customer on account. Required (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry to record the receipt of the payment of the note at maturity. ANSWER:

(a)

(b)

The due date for the note is December 8, determined as follows: August (31–10)

21 days

September

30 days

October

31 days

November

30 days

December

8 days

Total

120 days

$185,400 {$180,000 + [$180,000 × 9% × (120/360)]}

Cash Notes Receivable Interest Revenue

185,400 180,000 5,400

POINTS: DIFFICULTY:

Page 101

Chapter 9 - Receivables 180. Determine the due date and the amount of interest due at maturity on the following notes:

(a) (b) (c) (d) (e)

Date of Note October 1 August 30 May 30 March 6 May 23

Face Amount Interest Rate $21,000 8% 9,000 10 12,000 12 15,000 9 9,000 10

Term of Note 60 days 120 days 90 days 60 days 60 days

Due Date Interest (a) Nov. 30 $280 [$21,000 × 0.08 × (60/360)] (b) Dec. 28 300 [$9,000 × 0.10 × (120/360)] (c) Aug. 28 360 [$12,000 × 0.12 × (90/360)] (d) May 5 225 [$15,000 × 0.09 × (60/360)] (e) July 22 150 [$9,000 × 0.10 × (60/360)] POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM ANSWER:

Page 102

Chapter 9 - Receivables 181. Journalize the following transactions for Lucite Company. Nov. 14 Received a $4,800, 90-day, 9% note from Alan Albertson in payment of his account. Dec. 31 Accrued interest on the Albertson note. Feb. 12 Received the amount due from Albertson on his note.

Date

ANSWER:

Post. Ref.

Description

Nov. 14

Dec. 31

Feb. 12

Debit

Credit

Notes Receivable—Alan Albertson Accounts Receivable—Alan Albertson Interest Receivable Interest Revenue Cash Interest Receivable Interest Revenue Notes Receivable—Alan Albertson

4,800.00 4,800.00 56.40 56.40 4,908.00 56.40 51.60 4,800.00

POINTS: DIFFICULTY:

Page 103

Chapter 9 - Receivables 182. For each of the following notes receivables held by Winter Company, determine the interest revenue to be reported on the income statements. Round answers to nearest whole dollar.

Date

Face

Rate

Term

Aug. 8, Year 1

$15,000

180 days

Oct. 7, Year 1

22,000

60 days

Jan. 6, Year 2

30,000

90 days

Nov. 12, Year 1

28,000

60 days

Year 1 Year 2 Interest Interest Revenue Revenue

ANSWER:

Date Aug. 8, Year 1 Oct. 7, Year 1 Jan. 6, Year 2 Nov. 12, Year 1

Face

Rate

$15,000 22,000 30,000 28,000

7% 8 8 9

Year 1 Year 2 Interest Interest Term Revenue Revenue 180 days $423* $102** 60 days 293 0 90 days 0 600 60 days 343 77

*$15,000 × 0.07 × 145/360 = $423 (rounded) **$15,000 × 0.07 × 180/360 = $525 – $423 = $102 POINTS: DIFFICULTY:

Page 104

Chapter 9 - Receivables 183. Mr. Potts issued a 90-day, 7% note for $200,000, dated February 3 to Valley Co. on account. (Assume a 360-day year when calculating interest.) (a) Determine the due date of the note. (b) Determine the interest. (c) Determine the maturity value of the note. (d) Journalize the entry to record the receipt of the note from Potts on February 3. (e) Journalize the entry to record the receipt of payment of the note at maturity by Valley Co. ANSWER:

(a) May 4, determined as February March April May

25 days (28–3) 31 days 30 days 4 days 90 days

(b)

Interest = Face Amount (or principal) × Rate × Time Interest = $200,000 × 0.07 × 90/360 Interest = $3,500

(c)

Maturity Value = Face Amount + Interest Maturity Value = $200,000 + $3,500 Maturity Value = $203,500

(d) Notes Receivable—Mr. Potts Accounts Receivable—Mr. Potts

200,000

(e) Cash

203,500 Notes Receivable—Mr. Potts Interest Revenue

200,000

200,000 3,500

POINTS: DIFFICULTY:

Page 105

Chapter 9 - Receivables 184. Lone Star Company received a 90-day, 6% note for $80,000, dated March 12 from a customer on account. (Assume a 360-day year when calculating interest.) (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry to record the receipt of the payment of the note at maturity. ANSWER:

(a) June 10, determined as: March April May June Total

19 days (31–12) 30 days 31 days 10 days 90 days

(b) $81,200 {$80,000 + [$80,000 × 6% – (90/360)]} (c) June 10 Cash Notes Receivable Interest Revenue

81,200 80,000 1,200

POINTS: DIFFICULTY:

Page 106

Chapter 9 - Receivables 185. Watson Co. issued a 60-day, 8% note for $18,000, dated April 5, to Laker Company on account. (Assume a 360-day year when calculating interest.) (a)

Determine the due date of the note.

(b)

Determine the maturity value of the note.

(c)

Journalize the entries to record the following: (1)

Receipt of the note by the payee.

(2)

Receipt by the payee of the amount due on the note at maturity. Round answers to the nearest $1.

ANSWER:

(a)

June 4

(b)

$18,240

18,000

Accounts Receivable—Watson Co.

Cash Notes Receivable—Watson Co. Interest Revenue

18,000

18,240 18,000 240

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM

Page 107

Chapter 9 - Receivables 186. Journalize the following transactions (assume a 360-day year when calculating interest): Mar. 1 May 30

Received a 90-day, 10% note for $24,000, dated March 1, from Batson Co. on account. The note of March 1 was dishonored.

ANSWER:

Mar. 1

May 30

Notes Receivable—Batson Co. Accounts Receivable—Batson Co.

24,000

Accounts Receivable—Batson Co. Notes Receivable Interest Revenue

24,600

24,000

24,000 600

POINTS: DIFFICULTY:

Page 108

Chapter 9 - Receivables 187. Journalize the following transactions of Upton Drugs: July 8

Received a $180,000, 90-day, 8% note dated July 8 from Miracle Chemical on account.

Oct. 6

The note is dishonored by Miracle Chemical.

Nov. 5

Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Miracle Chemical on October 6.

ANSWER:

July 8

Notes Receivable—Miracle Chemical

180,000 180,000

Accounts Receivable—Miracle Chemical Oct. 6

Accounts Receivable—Miracle Chemical

183,600 180,000

Notes Receivable—Miracle Chemical

3,600

Interest Revenue Nov. 5

Cash Accounts Receivable—Miracle Chemical Interest Revenue

185,130 183,600 1,530*

*$183,600 × 0.10 × 30/360 = $1,530 POINTS: DIFFICULTY:

Page 109

Chapter 9 - Receivables

Date

Description

Post. Ref.

Debit

Credit

ANSWER:

Date Description Nov. 4 Notes Receivable—Michael Tims Accounts Receivable—Michael Tims Dec. 31 Interest Receivable Interest Revenue Feb. 2 Cash Interest Receivable Interest Revenue Notes Receivable—Michael Tims

Post. Ref.

Debit Credit 6,500.00 6,500.00

61.75 61.75 6,597.50 61.75 35.75 6,500.00

$6,500 × 6% × 57/360 = $61.75 $6,500 × 6% × 33/360 = $35.75 POINTS: DIFFICULTY:

Page 110

Chapter 9 - Receivables 189. For each of the following notes receivables held by Christensen Company, determine the interest revenue to be reported on the income statements for the year ended December 31. Round answers to the nearest whole dollar. Date Aug. 8 Oct. 7 Jan. 6 Nov. 12

Face $45,000 62,000 28,000 43,000

Rate 7% 5 4 6

Term Interest Revenue 45 days 60 days 120 days 60 days

ANSWER: Date Aug. 8 Oct. 7 Jan. 6 Nov. 12

Face $45,000 62,000 28,000 43,000

Rate 7% 5 4 6

Term 45 days 60 days 120 days 49 days

Interest Revenue $394 517 373 351

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM 190. Journalize the following transactions in the accounts of Simmons Company: Mar. 1 Received a $60,000, 60-day, 6% note dated March 1 from Bynum Co. on account. 18 Received a $25,000, 60-day, 9% note dated March 18 from Solo Co. on account. Apr. 30 The note dated March 1 from Bynum Co. is dishonored, and the customer’s account is charged for the note, including interest. May 17 The note dated March 18 from Solo Co. is dishonored, and the customer’s account is charged for the note, including interest. July 29 Cash is received for the amount due on the dishonored note dated March 1 plus interest for 90 days at 8% on the total amount debited to Bynum Co. on April 30. Aug. 23 Wrote off against the allowance account the amount charged to Solo Co. on May 17 for the dishonored note dated March 18. ANSWER:

Mar.1 Notes Receivable—Bynum Co.

60,000 60,000

Accounts Receivable—Bynum Co. 18 Notes Receivable—Solo Co. Copyright Cengage Learning. Powered by Cognero.

25,000 Page 111

Chapter 9 - Receivables 25,000

Accounts Receivable—Solo Co. Apr. 30 Accounts Receivable—Bynum Co.

60,600 60,000

Notes Receivable—Bynum Co.

600*

Interest Revenue *($60,000 × 6% × 60/360) May 17 Accounts Receivable—Solo Co.

25,375 25,000

Notes Receivable—Solo Co.

375*

Interest Revenue *($25,000 × 9% × 60/360) July 29 Cash

61,812

Accounts Receivable—Bynum Co.

60,600

Interest Revenue

1,212*

*60,600 × 8% × 90/360 = $1,212 Aug.23 Allowance for Doubtful Accounts Accounts Receivable—Solo Co.

25,375 25,375

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-04 - 09-04 ACCT.WARD.18.09-06 - 09-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:22 PM

Page 112

Chapter 9 - Receivables 191. On the basis of the following data related to assets due within one year for Simons Co., prepare a partial balance sheet in good form at December 31. Show total current assets. Cash Accounts receivable Allowance for doubtful accounts Interest receivable Supplies Inventory Other current assets

$ 56,000 325,000 25,000 3,000 4,000 45,000 10,000

ANSWER: Simons Co. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Less allowance for doubtful accounts Inventory Interest receivable Supplies Other current assets Total current assets

$ 56,000 $325,000 25,000

300,000 45,000 3,000 4,000 10,000 $418,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-07 - 09-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:24 PM

Page 113

Chapter 9 - Receivables 192. On the basis of the following data related to assets due within one year for Webb Co., prepare a partial balance sheet in good form at December 31. Show total current assets. $96,000 50,000 275,000 40,000 1,000

Cash Notes receivable Accounts receivable Allowance for doubtful accounts Interest receivable ANSWER:

Webb Co. Balance Sheet December 31 Assets Current Assets: Cash Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Total current assets

$96,000 50,000 275,000 40,000

235,000 1,000 $382,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-07 - 09-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 6:19 PM

Page 114

Chapter 9 - Receivables 193. The following are the current assets of Barnes Co. as of December 31: Accounts receivable Allowance for doubtful accounts Cash Interest receivable Merchandise inventory Notes receivable

$ 38,000 5,000 45,000 5,500 88,000 100,000

Prepare the Current assets section of the balance sheet. ANSWER: Barnes Co. Balance Sheet December 31 Assets Current assets: Cash

$ 45,000

Notes receivable

100,000

Accounts receivable

$38,000

Less allowance for doubtful accounts

5,000

33,000

Interest receivable

5,500

Merchandise inventory

88,000

Total current assets

$271,500

POINTS: DIFFICULTY:

Page 115

Chapter 9 - Receivables 194. Based on the following data and using a 365-day year, compute (a) the accounts receivable turnover and (b) days' sales in receivables for Year 2. Round to two decimal places. The industry average turnover is 20 times during the year, and the days' sales in receivables averages 25. (c) Comment on this situation. 12/31/Year 1 accounts receivable 12/31/Year 2 accounts receivable For the year ended 12/31/Year 1, sales For the year ended 12/31/Year 2, sales

$ 100,000 70,000 1,050,000 1,200,000

(a) $1,200,000 ÷ [($100,000 + $70,000) ÷ 2] = 14.12 (b) [($70,000 + $100,000) ÷ 2] ÷ ($1,200,000 ÷ 365 days) = 25.85 days (c) This situation is slightly better than the industry average. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 2/21/2017 1:52 PM ANSWER:

Page 116

Chapter 9 - Receivables 195. For fiscal Year 1 and Year 2, Grange Co. reported the following:

Sales Accounts receivable

Year Ended December 31, Year 2 Year 1 $34,124,961 $44,123,486 719,365 749,321

(a) Compute the accounts receivable turnover for Year 2. Round to two decimal places. (b) Compute the days’ sales in receivables at the end of Year 2. Round to two decimal places.

ANSWER:

(a) Accounts Receivable Turnover = Net Sales/Average Accounts Receivable Accounts Receivable Turnover = $34,124,961/[($749,321 + $719,365)/2] Accounts Receivable Turnover = 46.47 times (b) Days’ Sales in Receivables = Accounts Receivable, End of Year/Average Daily Sales Days’ Sales in Receivables = [($749,321 + $719,365)/2]/ ($34,124,961/365 days) Days’ Sales in Receivables = 7.85 days

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:30 PM 196. Financial statement data for the years ended December 31 for Parker Corporation are as follows:

Sales Accounts receivable: Beginning of year End of year

Current Year $2,595,600

Prior Year $2,409,500

390,000 434,000

400,000 390,000

(a) Determine the accounts receivable turnover for each year. Round to one decimal place. (b) Determine the days’ sales in receivables for each year. Round to whole days. (c) Does the change in accounts receivable turnover and days’ sales in receivables from the first year to the second year indicate a favorable or unfavorable trend? ANSWER:

(a) Accounts receivable turnover:

Page 117

Chapter 9 - Receivables Current Year Year Average accounts receivable: ($390,000 + $434,000)/2 ($400,000 + $390,000)/2 Accounts receivable turnover: $2,595,600/$412,000 $2,409,500/$395,000

Prior

$412,000 $395,000 6.3 6.1

(b) Days’ sales in receivables: Current Year Average daily sales: ($2,595,600/365 days) ($2,409,500/365 days)

$7,111

Days’ sales in receivables: ($412,000/$7,111) ($395,000/$6,601)

58 days

Prior Year

$6,601

60 days

(c) The increase in the accounts receivable turnover from 6.1 to 6.3 times and the decrease in days’ sales in receivables from 60 days to 58 days indicate a favorable trend in the efficiency of collection of accounts receivable. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.09-08 - 09-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:03 PM DATE MODIFIED: 3/2/2017 4:32 PM

Page 118

Chapter 10 - Long-Term Assets: Fixed and Intangible True / False 1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

Page 1

Chapter 10 - Long-Term Assets: Fixed and Intangible 3. When land is purchased to construct a new building, the cost of removing any structures on the land should be charged to the building account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 4. Land acquired as a speculation is reported under Investments on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 10 - Long-Term Assets: Fixed and Intangible 5. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 6. The cost of repairing damage to a machine during installation is debited to a fixed asset account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

Page 3

Chapter 10 - Long-Term Assets: Fixed and Intangible 7. During construction of a building, the cost of interest on a construction loan should be charged to an expense account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 8. The cost of computer equipment does not include the consultant's fee to supervise installation of the equipment. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 10 - Long-Term Assets: Fixed and Intangible 9. An asset leased under an operating lease will appear on the balance sheet as a long-term asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 10 - Long-Term Assets: Fixed and Intangible 11. A tangible asset is one that lacks physical existence. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/1/2017 9:45 AM DATE MODIFIED: 2/1/2017 9:55 AM 12. Capital expenditures are costs that improve a fixed asset or extend its useful life. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 10 - Long-Term Assets: Fixed and Intangible 13. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the future. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 14. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are called capital expenditures. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 10 - Long-Term Assets: Fixed and Intangible 15. The cost of replacing an engine in a truck is an example of ordinary maintenance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 16. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level for which it was intended. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 10 - Long-Term Assets: Fixed and Intangible 17. The normal balance of the accumulated depreciation account is a debit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 18. As a company records depreciation expense for a period of time, cash is accumulated to replace fixed assets as they wear out. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 10 - Long-Term Assets: Fixed and Intangible 19. All property, plant, and equipment assets are depreciated over time. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 20. The book value of a fixed asset reported on the balance sheet represents its market value on that date. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 10 - Long-Term Assets: Fixed and Intangible 21. The depreciable cost of a building is the same as its acquisition cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 22. It is necessary for a company to use the same depreciation method for all of its depreciable assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 11

Chapter 10 - Long-Term Assets: Fixed and Intangible 23. It is not necessary for a company to use the same depreciation method for all of its fixed assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 10:17 AM 24. An estimate of the amount for which an asset can be sold at the end of its useful life is called residual value. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 12

Chapter 10 - Long-Term Assets: Fixed and Intangible 25. The units-of-activity depreciation method provides a good match of expenses against revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 10:19 AM 26. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts cannot be changed. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 10 - Long-Term Assets: Fixed and Intangible 27. Residual value is not incorporated in the initial calculations for double-declining-balance depreciation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 28. The double-declining-balance method is an accelerated depreciation method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 10 - Long-Term Assets: Fixed and Intangible 29. The double-declining-balance depreciation method calculates depreciation each year by taking twice the straight-line rate times the book value of the asset at the beginning of each year. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 30. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of five years, is $19,000 by the straight-line method. a. True b. False ANSWER: RATIONALE:

False Annual Depreciation = (Cost – Residual Value)/Useful Life = ($95,000 – $5,000)/5 = $18,000.

POINTS: DIFFICULTY:

Page 15

Chapter 10 - Long-Term Assets: Fixed and Intangible 31. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of five years or 20,000 operating hours, is $21,375 by the units-of-activity method during a period when the asset was used for 4,500 hours. a. True b. False ANSWER: RATIONALE:

False Depreciation per Operating Hour = (Cost – Residual Value)/Total Units of Output = ($95,000 – $5,000)/20,000 hours Depreciation Expense = Depreciation per Operating Hour × Total Units of Output Used = $4.5 × 4,500 hours = $20,250

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 10:36 AM 32. The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000, with an estimated residual value of $5,000 and a useful life of four years, is $25,000 by the double-declining-balance method. a. True b. False ANSWER: RATIONALE:

True Double-Declining-Balance Rate = (1/4) × 2 = 50% First-Year Depreciation = $100,000 × 50% = $50,000 Second-Year Depreciation = ($100,000 – $50,000) × 50% = $25,000

POINTS: DIFFICULTY:

Page 16

Chapter 10 - Long-Term Assets: Fixed and Intangible 33. When depreciation estimates are revised, all years of the asset’s life are affected. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 34. The double-declining-balance method of depreciation uses a declining percentage rate in determining the depreciation amount. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 10 - Long-Term Assets: Fixed and Intangible 35. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 36. Revising depreciation estimates affects the amounts of depreciation expense recorded in past periods. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 18

Chapter 10 - Long-Term Assets: Fixed and Intangible 37. Capital expenditures are costs that are charged to stockholders' equity accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 38. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

Page 19

Chapter 10 - Long-Term Assets: Fixed and Intangible 39. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 40. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 41. Losses on the discarding of fixed assets are reported in the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 42. A gain can be realized when a fixed asset is discarded. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 43. The entry to record the disposal of fixed assets will include a credit to Accumulated Depreciation. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 12:19 PM 44. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with the disposal of the asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 45. Minerals removed from the earth are classified as intangible assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 46. The method used to calculate the depletion of a natural resource is the straight-line method. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 47. Intangible assets differ from property, plant, and equipment assets in that they lack physical substance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 48. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of seven years is amortized over 10 years. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 12:25 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 49. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in usefulness is called amortization. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 50. Costs associated with normal research and development activities should be treated as intangible assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 51. Patents are exclusive rights to produce and sell goods with one or more unique features. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 52. When a company establishes an outstanding reputation and has a competitive advantage because of it, the company should record goodwill on its financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 53. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 54. When old equipment is traded in for a new equipment, the difference between the list price and the trade-in allowance is called boot. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 12:29 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 55. When a plant asset is traded for another similar asset, losses on the asset traded are not recognized. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 56. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 57. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller, and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. a. True b. False ANSWER: RATIONALE:

True Gain on Exchange = Trade-In Allowance – Book Value of Asset = $15,000 – $10,000 = $5,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 58. When a seller allows a buyer an amount for old equipment that is traded in for new equipment of similar use, this amount is known as boot. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 59. An exchange is said to have commercial substance if future cash flows remain the same as a result of the exchange. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM Multiple Choice 60. A characteristic of a fixed asset is that it is a. intangible b. used in the operations of a business c. held for sale in the ordinary course of the business d. a short-term investment ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 61. Land acquired so it can be resold in the future is listed on the balance sheet as a(n) a. fixed asset b. current asset c. investment d. intangible asset ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 62. Which of the following should be included in the acquisition cost of a piece of equipment? a. transportation costs b. installation costs c. testing costs prior to placing the equipment into production d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 12:58 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 63. Which of the following is included in the cost of constructing a building? a. insurance costs during construction b. cost of paving the parking lot c. cost of repairing vandalism damage during construction d. cost of removing the demolished building existing on the land when it was purchased ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 64. Which of the following is included in the cost of land? a. cost of paving a parking lot b. brokerage commission c. outdoor parking lot lighting attached to the land d. fences on the land ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 65. The proper journal entry to purchase a computer costing $975 on account to be utilized within the business would be a. Office Supplies 975 Accounts Payable 975 b. Office Equipment 975 Accounts Payable 975 c. Office Supplies 975 Accounts Receivable 975 d. Office Equipment 975 Accounts Receivable 975 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 66. A building with an appraisal value of $154,000 is made available at an offer price of $172,000. The purchaser acquires the property for $40,000 in cash, a 90-day note payable for $45,000, and a mortgage amounting to $75,000. The cost basis recorded in the buyer's accounting records to recognize this purchase is a. $154,000 b. $172,000 c. $160,000 d. $120,000 ANSWER: RATIONALE:

c The cost basis recorded in the buyer's accounting records to recognize this purchase is calculated as $40,000 + $45,000 + $75,000 = $160,000.

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 67. A used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $3,000, would have a cost basis of a. $93,000 b. $90,000 c. $82,000 d. $85,000 ANSWER: RATIONALE:

a Cost Basis of Machine = Purchase Price + Overhaul Cost + Installation Cost + Special Acquisition Fees = $77,000 + $8,000 + $5,000 + $3,000 = $93,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 68. A new machine with a purchase price of $109,000, with transportation costs of $12,000, installation costs of $5,000, and special acquisition fees of $6,000, would have a cost basis of a. $114,000 b. $126,000 c. $121,000 d. $132,000 ANSWER: RATIONALE:

d Cost Basis of Machine = Purchase Price + Transportation Cost + Installation Cost + Special Acquisition Fees = $109,000 + $12,000 + $5,000 + $6,000 = $132,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 69. In a lease contract, the party who legally owns the asset is the a. lessee b. lessor c. operator d. banker ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 70. The journal entry for recording payment for the short-term lease of a fixed asset would a. be a memo entry only b. debit the fixed asset and credit Cash c. debit Rent Expense and credit Cash d. debit a liability and credit Cash ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 71. Which of the following are criteria for determining whether to record an asset as a fixed asset? a. must be an investment and long-lived b. must be long-lived and used by the company in its normal operations c. must be short-lived and tangible d. must be tangible and an investment ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/8/2017 7:42 PM 72. Expenditures that add to the utility of fixed assets for more than one accounting period are a. committed expenditures b. revenue expenditures c. utility expenditures d. capital expenditures ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 73. A capital expenditure results in a debit to a(n) a. expense account b. capital account c. liability account d. asset account ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 4:28 PM 74. Which of the following is an example of a capital expenditure? a. cleaning the carpet in the front room b. tune-up for a company truck c. replacing an engine in a company car d. replacing all burned-out light bulbs in the factory ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 4:32 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 75. Factors contributing to a decline in the usefulness of a fixed asset may be divided into which of the following two categories? a. salvage and functional b. physical and functional c. residual and salvage d. functional and residual ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 4:35 PM 76. A fixed asset's estimated value at the time it is to be retired from service is called a. book value b. residual value c. market value d. carrying value ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 77. All of the following are needed for the calculation of straight-line depreciation except a. cost b. residual value c. estimated life d. units produced ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 78. The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset is the a. units-of-production method b. double-declining-balance method c. straight-line method d. time-valuation method ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 79. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue is a. the double-declining-balance method b. the straight-line method c. the units-of-activity method d. MACRS ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 4:37 PM 80. A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of five years or 15,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $5,000 b. $35,000 c. $21,000 d. $45,000 ANSWER: RATIONALE:

b Depreciation per Operating Hour = (Cost – Residual Value)/Total Units of Output = ($120,000 – $15,000)/15,000 hours = $7 Depreciation Expense = Depreciation per Operating Hour × Total Units of Output Used = $7 × 5,000 hours = $35,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 4:40 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 81. Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10 years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,100 hours? a. $19,000 b. $21,000 c. $22,000 d. $30,000 ANSWER: RATIONALE:

a Annual Depreciation = (Cost – Residual Value)/Useful Life = ($220,000 – $30,000)/10 = $19,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 82. A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of four years or 18,000 hours. What is the amount of depreciation for the second full year, using the double-declining-balance method? a. $17,500 b. $37,500 c. $18,750 d. $16,667 ANSWER: RATIONALE:

c Double-Declining-Balance Rate = (1/4) × 2 = 50% First-Year Depreciation = $75,000 × 50% = $37,500 Second-Year Depreciation = ($75,000 – $37,500) × 50% = $18,750

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 83. Equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for four years. Due to obsolescence, it was determined that the remaining useful life should be shortened by three years and the residual value changed to zero. The depreciation expense for the current and future years is a. $11,636 b. $16,000 c. $11,000 d. $8,000 ANSWER: RATIONALE:

b Depreciation for First 4 Years = [(Initial Cost – Residual Value)/Estimated Life] ×4 Depreciation for First 4 Years = [($160,000 – $40,000) ÷ 15] × 4 = $32,000 Book Value at End of 4th Year = $160,000 – $32,000 = $128,000 Depreciation Expense for Current and Future Years = $128,000/(15 – 4 – 3) = $16,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 84. The depreciation method that does not use residual value in calculating the first year's depreciation expense is a. straight-line b. units-of-activity c. double-declining-balance d. sum-of-the-years-digits ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 85. If a fixed asset, such as a computer, were purchased on January 1 for $3,750 with an estimated life of three years and a salvage or residual value of $150, the journal entry for monthly expense under straight-line depreciation is a. Depreciation Expense 100 Accumulated Depreciation 100 b. Depreciation Expense 1,200 Accumulated Depreciation 1,200 c. Accumulated Depreciation 1,200 Depreciation Expense 1,200 d. Accumulated Depreciation 100 Depreciation Expense 100 ANSWER: RATIONALE:

a Monthly Depreciation Expense = (Cost – Residual Value)/Useful Life = [($3,750 – $150)/3]/12 = $100 Depreciation Expense 100 Accumulated Depreciation 100

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 86. Accumulated Depreciation a. is used to show the amount of cost expiration of intangibles b. is the same as Depreciation Expense c. is a contra asset account d. is used to show the amount of cost expiration of natural resources ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 8:39 AM 87. Residual value is also known as all of the following except a. scrap value b. trade-in value c. salvage value d. net book value ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 88. The formula for depreciable cost is a. Initial Cost + Residual Value b. Initial Cost – Residual Value c. Initial Cost – Accumulated Depreciation d. Depreciable Cost = Initial Cost ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:42 PM DATE MODIFIED: 2/1/2017 9:10 PM 89. Expected useful life is a. calculated when the asset is sold b. estimated at the time that the asset is placed in service c. determined each year that the depreciation calculation is made d. None of these choices ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:11 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 90. The calculation for annual depreciation using the straight-line depreciation method is a. Initial Cost/Estimated Useful Life b. Depreciable Cost/Estimated Useful Life c. Depreciable Cost × Estimated Useful Life d. Initial Cost × Estimated Useful Life ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:13 PM 91. The calculation for annual depreciation using the units-of-activity method is a. (Initial Cost/Estimated Output) × Actual Yearly Output b. (Depreciable Cost/Yearly Output) × Estimated Output c. Depreciable Cost/Yearly Output d. (Depreciable Cost/Estimated Output) × Actual Yearly Output ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:23 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 92. On June 1, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years and 30,000 hours, which ends on December 31. Using straight-line depreciation, calculate depreciation expense for the final (partial) year of service. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: RATIONALE:

c Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for Final (partial) Year of Service = ($30,000/12) × 5 = $12,500

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 93. On June 1, Michael Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years or 30,000 hours. Using straight-line depreciation, calculate depreciation expense for the second year. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: RATIONALE:

b Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for the Second Year = $30,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 94. On June 1, Scotter Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years or 30,000 hours. Using straight-line depreciation, calculate depreciation expense for the first year, which ends on December 31. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: RATIONALE:

a Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for Second Year = ($30,000/12) × 7 = $17,500

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 95. Computer equipment was acquired at the beginning of the year at a cost of $57,000 that has an estimated residual value of $9,000 and an estimated useful life of five years. Determine the second-year depreciation using the straightline method. a. $13,200 b. $19,200 c. $9,600 d. $9,000 ANSWER: RATIONALE:

c Annual Depreciation = (Cost – Residual Value)/Useful Life = ($57,000 – $9,000)/5 = $9,600 Depreciation Expense for the Second Year = $9,600

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:29 PM 96. Which of the following is true? a. If using the double-declining-balance method, the total amount of depreciation expense during the life of the asset will be the highest. b. If using the units-of-activity method, it is possible to depreciate more than the depreciable cost. c. If using the straight-line method, the amount of depreciation expense during the first year is higher than that of the double-declining-balance. d. Regardless of the depreciation method, the amount of total depreciation expense during the life of the asset will be the same. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:33 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 97. An asset was purchased for $120,000 on January 1, Year 1 and originally estimated to have a useful life of 10 years with a residual value of $10,000. At the beginning of the third year, it was determined that the remaining useful life of the asset was only four years with a residual value of $2,000. Calculate the third-year depreciation expense using the revised amounts and straight-line method. a. $25,000 b. $11,000 c. $24,000 d. $24,500 ANSWER: RATIONALE:

c Depreciation for First 2 years = [($120,000 – $10,000) ÷ 10] × 2 = $22,000 Book Value at End of 4th Year = $120,000 – $22,000 = $98,000 Depreciation Expense for Third Year = ($98,000 – $2,000)/4 = $24,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 98. Machinery was purchased on January 1 for $51,000. The machinery has an estimated life of seven years and an estimated salvage value of $9,000. Double-declining-balance depreciation for the second year would be (round calculations to the nearest dollar): a. $10,929 b. $6,000 c. $10,500 d. $10,408 ANSWER: RATIONALE:

d Double-Declining-Balance Rate = (1/7) × 2 = 28.57% First-Year Depreciation = $51,000 × 28.57% = $14,571 Second-Year Depreciation = ($51,000 – $14,571) × 28.57% = $10,408

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:37 PM 99. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3,500. What is the amount of the gain or loss on disposal of the fixed asset? a. $2,000 loss b. $1,500 loss c. $3,500 gain d. $2,000 gain ANSWER: RATIONALE:

d Gain on Sale = Selling Price – Book Value of Asset = $3,500 – ($30,000 – $28,500) = $2,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 100. When a company discards machinery that is fully depreciated, this transaction would be recorded as a a. debit to Accumulated Depreciation and credit to Machinery b. debit to Machinery and a credit to Accumulated Depreciation c. debit to Cash and a credit to Accumulated Depreciation d. debit to Depreciation Expense and a credit Accumulated Depreciation ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 9:44 PM 101. When a company sells machinery at a price equal to its book value, this transaction would be recorded as a a. debit to Cash and Accumulated Depreciation and a credit to Machinery b. debit to Machinery and a credit to Cash and Accumulated Depreciation c. debit to Cash and Machinery and a credit to Accumulated Depreciation d. debit to Cash and Depreciation Expense and a credit to Accumulated Depreciation ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 102. On December 31, Strike Company has decided to discard one of its batting cages. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. Which of the following will be included in the entry to record the disposal? a. Accumulated Depreciation, debit, $310,000 b. Loss on Disposal of Asset, debit, $260,000 c. Equipment, credit, $310,000 d. Gain on Disposal of Asset, credit, $50,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 7:56 PM 103. On December 31, Strike Company sold one of its batting cages for $50,000. The equipment had an original cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $50,000 b. loss of $50,000 c. no gain or loss d. cannot be determined ANSWER: RATIONALE:

c Gain on Sale = Selling Price – Book Value of Asset = $50,000 – ($310,000 – $260,000) = $0

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 104. On December 31, Strike Company sold one of its batting cages for $20,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $20,000 b. gain of $30,000 c. loss of $20,000 d. loss of $30,000 ANSWER: RATIONALE:

d Loss on Sale = Selling Price – Book Value of Asset = $20,000 – ($310,000 – $260,000) = $(30,000)

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:31 PM 105. On December 31, Strike Company sold one of its batting cages for $55,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been taken up to the end of the year. What is the amount of the gain or loss on this transaction? a. loss of $55,000 b. loss of $5,000 c. gain of $5,000 d. gain of $55,000 ANSWER: RATIONALE:

c Gain on Sale = Selling Price – Book Value of Asset = $55,000 – ($310,000 – $260,000) = $5,000

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 106. The accumulated depletion account is a. an expense account b. an intangible asset account c. reported on the income statement as other expense d. reported on the balance sheet as a deduction from the cost of the mineral deposit ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 107. The accumulated depletion of a natural resource is reported on the a. balance sheet as depreciation from the cost of the resource b. income statement as an increase in revenue c. balance sheet as a deduction from the cost of the resource d. income statement as a deduction from revenues ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 10:57 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 108. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called a. depletion b. deferral c. amortization d. depreciation ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 109. Sands Company purchased mining rights for $500,000. It expects to harvest 1 million tons of ore over the next five years. During the current year, Sands mined 350,000 tons of ore. The entry to record the depletion would include a a. debit to Depletion Expense for $175,000 b. credit to Depletion Expense for $350,000 c. debit to Accumulated Depletion for $175,000 d. credit to Accumulated Depletion for $350,000 ANSWER: RATIONALE:

a Depletion Rate = Cost of Resource/Estimated Total Units of Resource = $500,000/1,000,000 tons = $0.50 Depletion Expense = Depletion Rate × Quantity Extracted = $0.50 × 350,000 tons = $175,000 The entry to record the depletion would include a debit to Depletion Expense for $175,000.

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:01 AM 110. The natural resources of some companies include a. timber, metal ores, and minerals b. timber, equipment, and patents c. minerals, trademarks, and land d. metal ores, copyrights, and supplies ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 111. Weber Company purchased a mining site for $1,750,000 on July 1. The company expects to mine ore for the next 10 years and anticipates that a total of 400,000 tons will be recovered. The estimated residual value of the property is $150,000. During the first year, the company extracted 6,500 tons of ore. The depletion expense is a. $17,500 b. $16,000 c. $26,000 d. $15,000 ANSWER: RATIONALE:

c Depletion Rate = Cost of Resource/Estimated Total Units of Resource = ($1,750,000 – $150,000)/400,000 = $4 Depletion Expense = Depletion Rate × Quantity Extracted = $4 × 6,500 tons = $26,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:37 PM 112. Expenditures for research and development are generally recorded as a. current operating expenses b. assets and amortized over their estimated useful life c. assets and amortized over 40 years d. current assets ANSWER: POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 113. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of intangible assets is a. amortization b. depletion c. depreciation d. allocation ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 114. Xtra Company purchased a business from Argus for $96,000 above the fair value of its net assets. Argus had developed the goodwill over 12 years. How much would Xtra amortize the goodwill for its first year? a. $7,000 b. $8,000 c. Goodwill is not amortized. d. not enough information to calculate amortization ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:39 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 115. Which intangible assets are amortized over their useful life? a. trademarks b. goodwill c. patents d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:40 PM 116. The name, term, or symbol used to identify a business and its products is called a. goodwill b. a patent c. a trademark d. a copyright ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 117. The process of transferring the cost of an asset to an expense account is called all of the following except a. depletion b. allocation c. amortization d. depreciation ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCT.WARD.18.10-04 - 10-04 ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:05 AM 118. Fixed assets are ordinarily presented on the balance sheet a. at current market values b. at replacement costs c. at cost less accumulated depreciation d. in a separate section along with intangible assets ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 119. The ratio measuring the number of dollars of sales earned per dollar of fixed assets is the a. fixed asset turnover ratio b. days' in assets ratio c. current asset turnover ratio d. intangible asset ratio ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Remembering Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:07 AM 120. The higher the fixed asset turnover, the a. less efficiently a company is using its fixed assets in generating sales b. more efficiently a company is using its fixed assets in generating sales c. more efficiently a company is using its current assets in generating sales d. more efficiently a company is using its intangible assets in generating sales ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:08 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 121. Which of the following statements is true? a. A larger fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. b. The fixed asset ratio cannot be compared across time for an individual company. c. A smaller fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. d. The fixed asset ratio is not useful for comparing different companies. ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:10 AM 122. Newport Company has sales of $2,025,000 for the current year. The book value of its fixed assets at the beginning of the year was $550,000 and at the end of the year was $800,000. The fixed asset turnover ratio for Newport is a. 3.0 b. 3.6 c. 3.7 d. 2.5 ANSWER: RATIONALE:

a Fixed Asset Turnover Ratio = Sales/Average Book Value of Fixed Assets = $2,025,000/[($550,000 + $800,000)/2)] = 3.0

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 11:12 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 123. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset priced at $60,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $5,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $59,500 c. $60,000 d. $60,500 ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 124. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset priced at $50,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $4,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $45,000 c. $51,000 d. $50,000 ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:43 PM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 125. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is a. $3,000 b. $4,500 c. $500 d. $1,500 ANSWER: RATIONALE:

d Loss on Exchange = Trade-In Allowance – Book Value of Asset = $3,000 – ($41,000 – $36,500) = $(1,500)

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 126. Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Bacon Company should record a. the new machinery at $16,700 b. the new machinery at $12,700 c. a gain of $1,500 d. a loss of $1,500 ANSWER: RATIONALE:

d Loss on Exchange = Trade-In Allowance – Book Value of Asset = ($15,200 – $12,700) – ($9,000 – $5,000) = $(1,500)

POINTS: DIFFICULTY:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 127. When a company exchanges machinery and receives a trade-in allowance greater than the book value, this transaction would be recorded with which of the following entries (assuming the exchange was considered to have commercial substance)? a. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Exchange of Machinery b. debit Machinery and Accumulated Depreciation; credit Machinery and Cash c. debit Cash and Machinery; credit Accumulated Depreciation d. debit Cash and Machinery; credit Accumulated Depreciation and Machinery ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 128. When a company exchanges machinery and receives a trade-in allowance less than the book value, this transaction would be recorded with which of the following entries? a. debit Machinery and Accumulated Depreciation; credit Machinery and Cash b. debit Cash and Machinery; credit Accumulated Depreciation c. debit Cash and Machinery; credit Accumulated Depreciation and Machinery d. debit Machinery, Accumulated Depreciation, and Loss on Exchange of Machinery; credit Machinery and Cash ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM

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Chapter 10 - Long-Term Assets: Fixed and Intangible 129. On December 31, Strike Company traded in one of its batting cages for another one that has a cost of $500,000. Strike receives a trade-in allowance of $11,000. The old equipment had an initial cost of $215,000 and has accumulated depreciation of $185,000. Depreciation has been recorded up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. loss of $11,000 b. gain of $11,000 c. loss of $19,000 d. No loss or gain will be recorded. ANSWER: RATIONALE:

c Loss on Exchange = Trade-In Allowance – Book Value of Asset = $11,000 – ($215,000 – $185,000) = $(19,000)

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 10:50 PM Matching Classify each of the following costs associated with long-lived assets as one of the following: a. Buildings b. Machinery and equipment c. Land d. Land improvements DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 130. Fees paid to architect to design new office building ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 131. Cost of insurance during the construction of new office building ANSWER: a POINTS: 1 132. Interest on money borrowed to finance construction of new office building ANSWER: a POINTS: 1 133. Sales taxes paid on new factory equipment ANSWER: b POINTS: 1 134. Freight costs paid on purchase of new equipment ANSWER: b POINTS: 1 135. Repairs made to used office equipment ANSWER: b POINTS: 1 136. Costs to survey a new piece of land for a new business location ANSWER: c POINTS: 1 137. Costs of government permits required to develop land for a new business location ANSWER: c POINTS: 1 138. Purchase price of land purchased for new business site ANSWER: c POINTS: 1 139. Landscaping at new business location ANSWER: d POINTS: 1 Classify each of the following costs associated with long-lived assets as one of the following: a. Land improvements b. Buildings c. Land d. Machinery and equipment DIFFICULTY: QUESTION TYPE: HAS VARIABLES: Copyright Cengage Learning. Powered by Cognero.

Easy Bloom's: Remembering Matching False Page 71

Chapter 10 - Long-Term Assets: Fixed and Intangible LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 140. Fences around land at new business location ANSWER: a POINTS: 1 141. Paved parking areas at new business location ANSWER: a POINTS: 1 142. Outdoor lighting at new business location ANSWER: a POINTS: 1 143. Walkways to surround new business location ANSWER: a POINTS: 1 144. Modifying a building purchased for new business location ANSWER: b POINTS: 1 145. Supplies (materials) used to test new equipment ANSWER: d POINTS: 1 146. Cost of installing new equipment ANSWER: d POINTS: 1 147. Cost of grading and leveling land to be used for a new business site ANSWER: c POINTS: 1 148. Cost of removing an existing building to ready land for use as a new business site ANSWER: c POINTS: 1 149. Cost assessed by city for paving a public street that borders land on which a new business location will be constructed ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible Classify each of the following as: a. Ordinary maintenance and repairs b. Asset improvements c. Extraordinary repairs DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 150. Overhauling an engine in a large truck ANSWER: c POINTS: 1 151. Exterior and interior painting ANSWER: a POINTS: 1 152. Paving a new parking lot ANSWER: b POINTS: 1 153. New landscaping ANSWER: b POINTS: 1 154. Installing a new air conditioning system in an old building ANSWER: b POINTS: 1 155. Resurfacing a pool in an apartment building ANSWER: c POINTS: 1 156. Adding refrigerant to an air conditioning system ANSWER: a POINTS: 1 157. Fixing damage due to a car accident ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10 - Long-Term Assets: Fixed and Intangible Match the intangible assets described with their proper classification (a–d). a. Patent b. Copyright c. Trademark d. Goodwill DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 8:07 PM 158. Rights to sell a book and make a profit ANSWER: b POINTS: 1 159. McDonald’s golden arches ANSWER: c POINTS: 1 160. A new kitchen gadget that can be produced by only one company ANSWER: a POINTS: 1 161. Location of a company ANSWER: d POINTS: 1 162. iTunes music ANSWER: b POINTS: 1 163. Reputation of a company ANSWER: d POINTS: 1 164. Nike swoosh ANSWER: c POINTS: 1

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Chapter 10 - Long-Term Assets: Fixed and Intangible 165. Mickey Mouse ANSWER: c POINTS: 1 Match each account name to the financial statement section (a–i) in which it would appear. a. Current assets b. Fixed assets c. Intangible assets d. Current liability e. Long-term liability f. Owner's equity g. Revenues h. Operating expenses i. Other revenue and expense DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCT.WARD.18.10-AP - 10-AP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 11:00 PM 166. Accumulated Depreciation—Buildings ANSWER: b POINTS: 1 167. Depreciation Expense ANSWER: h POINTS: 1 168. Amortization Expense ANSWER: h POINTS: 1 169. Land Improvements ANSWER: b POINTS: 1 170. Gain on Sale of Equipment ANSWER: i POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

Page 75

Chapter 10 - Long-Term Assets: Fixed and Intangible 171. Loss on Disposal of Asset ANSWER: i POINTS: 1 172. Loss from Impaired Goodwill ANSWER: i POINTS: 1 173. Research and Development Costs ANSWER: h POINTS: 1 Subjective Short Answer 174. What is the cost of the land, based on the following data? Land purchase price Broker's commission Payment for demolition and removal of existing building Cash received from sale of materials salvaged from demolished building ANSWER:

$178,000 15,000 5,000 2,000

$196,000 Cost of Land = Land Purchase Price + Broker's Commission + Payment for the Demolition and Removal of Existing Building – Cash Received from Sale of Materials Salvaged from Demolished Building = $178,000 + $15,000 + $5,000 – $2,000 = $196,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 7:40 AM

Page 76

Chapter 10 - Long-Term Assets: Fixed and Intangible 175. Falcon Company acquired an adjacent lot to construct a new warehouse, paying $40,000 and giving a short-term note for $410,000. Legal fees paid were $13,275, delinquent taxes assessed were $14,500, and fees paid to remove an old building from the land were $15,800. Materials salvaged from the demolition of the building were sold for $6,800. A contractor was paid $890,000 to construct the new warehouse. Determine the cost of the land to be reported on the balance sheet and show your work. ANSWER:

Initial cost of land ($40,000 + $410,000) Plus: Legal fees Delinquent taxes Demolition of building Less: Cost of land

$450,000 $13,275 14,500 15,800

Salvaged materials

43,575 $493,575 6,800 $486,775

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 7:42 AM

Page 77

Chapter 10 - Long-Term Assets: Fixed and Intangible 176. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c) Buildings, (d) Machinery and Equipment, or (e) other account. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20)

Cost of paving parking area for employees and customers Insurance during construction of building Interest incurred on loan during construction of building Fee paid for installation of equipment Special foundation for new equipment acquired Insurance on new equipment while in transit Freight charges on new equipment Cost of repairing vandalism damage to equipment during installation Sales tax on new equipment Cost incurred in repairing damage resulting from installation of new equipment Cost of land fill for building site Cost of lubricating oil purchased for periodic oil changes for equipment Parking lot lighting Installing a fence around the parking lot Repainting the trim on a building Special assessment paid to city for extension of water main to property Cost of razing and removing the old building on property acquired for a building site Delinquent real estate taxes assumed by purchaser on property acquired for a building site Attorney's fee for title search Architect's fee for building plans and supervision of construction

ANSWER:

(a) (b) (c) (d) (e)

11, 16, 17, 18, 19 1, 13, 14 2, 3, 20 4, 5, 6, 7, 9 8, 10, 12, 15

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM

Page 78

Chapter 10 - Long-Term Assets: Fixed and Intangible 177. Eagle Country Club has acquired a lot to construct a clubhouse. Eagle had the following costs related to the construction: Architects’ fees Construction labor Engineers’ fees Fences around building Grading and leveling Insurance costs incurred during construction Interest on money borrowed for construction Land Building materials Sales taxes Trees and shrubs

$ 45,000 80,000 15,000 9,000 10,000 7,000 5,000 73,000 237,000 6,000 6,000

Determine the cost of the club house to be reported on the balance sheet.

ANSWER:

Architects’ fees

$ 45,000

Construction labor

80,000

Engineers’ fees

15,000

Insurance costs incurred during construction

7,000

Interest on money borrowed for construction

5,000

Building materials Sales taxes Cost of club house

237,000 6,000 $395,000

POINTS: DIFFICULTY:

Page 79

Chapter 10 - Long-Term Assets: Fixed and Intangible 178. A number of major structural repairs completed at the beginning of the current fiscal year at a cost of $1,000,000 are expected to extend the life of a building 10 years beyond the original estimate. The original cost of the building was $6,552,000, and it has been depreciated by the straight-line method for 25 years. Estimated residual value is negligible and has been ignored. The related accumulated depreciation account after the depreciation adjustment at the end of the preceding fiscal year is $4,550,000. (a) What has the amount of annual depreciation been in past years? (b) What was the original life estimate of the building? (c) To what account should the $1,000,000 be debited? (d) What is the book value of the building after the extraordinary repairs have been made? (e) What is the expected remaining life of the building after the extraordinary repairs have been made? (f) What is the amount of straight-line depreciation for the current year, assuming that the repairs were completed at the very beginning of the current year? Round to the nearest dollar. ANSWER:

(a) (b) (c) (d) (e) (f)

$182,000 ($4,550,000 ÷ 25) 36 years ($6,552,000 ÷ $182,000) Accumulated Depreciation—Building $3,002,000 ($6,552,000 + $1,000,000 – $4,550,000) 21 years (36 – 25 + 10) $142,952 ($3,002,000 ÷ 21)

POINTS: DIFFICULTY:

Page 80

Chapter 10 - Long-Term Assets: Fixed and Intangible 179. Journalize each of the following transactions: (a) (b) (c)

A wing costing $2,345,000 was added to the building. A new mortgage was issued for the cost. Equipment was upgraded to increase its capacity to produce widgets. The upgrade cost of $11,500 was paid in cash. A major overhaul costing $8,000 on a machine increased the useful life by four years. The payment was made in cash.

ANSWER:

(a) Building Mortgage Payable

2,345,000 2,345,000

(b) Equipment Cash

11,500

8,000

11,500

8,000

POINTS: DIFFICULTY:

Page 81

Chapter 10 - Long-Term Assets: Fixed and Intangible 180. On April 15, Compton Co. paid $2,800 to upgrade a delivery truck and $125 for an oil change. Journalize the entries for the upgrade to the delivery truck and oil change expenditures. ANSWER:

Apr. 15 Delivery Truck

2,800 2,800

Cash

15 Repairs and Maintenance Expense Cash

125 125

POINTS: DIFFICULTY:

Page 82

Chapter 10 - Long-Term Assets: Fixed and Intangible 181. XYZ Co. incurred the following costs related to the office building used in operating its sports supply company: (a) (b) (c) (d) (e) (f) (g)

Replaced a broken window. Replaced the roof that had been on the building 23 years. Serviced all the air conditioners before summer started. Replaced the air conditioners in the customer service areas. Added a warehouse to the back of the building. Repainted the interior walls. Installed window shutters on all windows.

Classify each of the costs as a capital expenditure or a revenue expenditure. ANSWER:

(a) Revenue expenditure (b) Capital expenditure (c) Revenue expenditure (d) Capital expenditure (e) Capital expenditure (f) Revenue expenditure (g) Capital expenditure

POINTS: DIFFICULTY:

Page 83

Chapter 10 - Long-Term Assets: Fixed and Intangible 182. Comment on the validity of the following statements. "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." ANSWER:

Depreciation is the periodic transfer of the cost of an asset to expense. Depreciation is a noncash expense. Depreciation does not accumulate cash for replacements.

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 183. Computer equipment was acquired at the beginning of the year at a cost of $65,000 that has an estimated residual value of $3,800 and an estimated useful life of eight years. Determine the (a) depreciable cost, (b) straight-line rate, and (c) annual straight-line depreciation. ANSWER:

(a) (b) (c)

$61,200 (Initial Cost – Estimated Residual Value = $65,000 – $3,800) 12.5% (1/8) $7,650 ($61,200 × 0.125)

POINTS: DIFFICULTY:

Page 84

Chapter 10 - Long-Term Assets: Fixed and Intangible 184. The double-declining-balance rate for calculating depreciation expense is determined by doubling the straight-line rate. Assuming that an asset has a useful life of 25 years, determine the rate to be used under the double-decliningbalance method. ANSWER:

4% × 2 = 8%

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 7:52 AM 185. Copy equipment was acquired at the beginning of the year at a cost of $72,000 that has an estimated residual value of $9,000 and an estimated useful life of five years. It is estimated that the machine will output an estimated 1,000,000 copies. This year, 315,000 copies were made. Determine the (a) depreciable cost, (b) depreciation rate, and (c) units-of-activity depreciation for the year. ANSWER:

(a) (b) (c)

$63,000 (Initial Cost – Estimated Residual Value = $72,000 – $9,000) $0.063 per copy (Depreciable Cost/Total Units of Output = $63,000/1,000,000 copies) $19,845 (315,000 copies × $0.063)

POINTS: DIFFICULTY:

Page 85

Chapter 10 - Long-Term Assets: Fixed and Intangible 186. A machine costing $57,000 with a six-year life and $54,000 depreciable cost was purchased January 1. Compute the yearly depreciation expense using straight-line depreciation. ANSWER:

$54,000 ÷ 6 years = $9,000 per year

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 7:55 AM 187. A machine costing $185,000 with a five-year life and $20,000 residual value was purchased January 2. Compute depreciation for each of the five years, using the double-declining-balance method. ANSWER:

(1) (2) (3) (4) (5)

Year 1 $185,000 × 0.40 = $74,000 Year 2 $111,000 × 0.40 = $44,400 Year 3 $66,600 × 0.40 = $26,640 Year 4 $39,960 × 0.40 = $15,984 Year 5 $23,976 – $20,000 = $3,976

POINTS: DIFFICULTY:

Page 86

Chapter 10 - Long-Term Assets: Fixed and Intangible 188. Computer equipment was acquired at the beginning of the year at a cost of $63,000 that has an estimated residual value of $3,000 and an estimated useful life of five years. Determine the (a) depreciable cost (b) double-decliningbalance rate, and (c) double-declining-balance depreciation for the first year. ANSWER:

(a) $60,000 (Initial Cost – Estimated Residual Value = $63,000 – $3,000) (b) 40% (1/5) × 2 (c) $25,200 ($63,000 × 40%)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 7:57 AM 189. Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage. (a) 2 years (b) 8 years (c) 10 years (d) 20 years (e) 25 years (f) 40 years (g) 50 years ANSWER:

(a) 50% (1/2) (b) 12.5% (1/8) (c) 10% (1/10) (d) 5% (1/20) (e) 4% (1/25) (f) 2.5% (1/40) (g) 2% (1/50)

POINTS: DIFFICULTY:

Page 87

Chapter 10 - Long-Term Assets: Fixed and Intangible Depreciation—Trucks is $88,200. Details of the subsidiary ledger are as follows:

Truck No. 1 2 3 4

Cost $100,000 72,900 38,000 90,000

Estimated Estimated Useful Residual Value Life $13,000 9,900 3,000 13,000

Accumulated Depreciation at Beginning of Year

300,000 300,000 200,000 200,000

— $60,000 8,050 20,150

Miles Operated During Year 30,000 25,000 45,000 40,000

Required (a) Based on the units-of-activity method, determine the depreciation rates per mile and the amount to be credited to the Accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. (b) Journalize the entry to record depreciation for the year. ANSWER:

(a) Truck No.

Rate per Mile

Miles Operated

Depreciation

29.0 cents

30,000

$ 8,700

21.0

25,000

3,000*

17.5

45,000

7,875

38.5

40,000

15,400 $34,975

Total

*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000, which reduces the book value of the truck to $9,900, its residual value. (b) Depreciation Expense—Trucks Accumulated Depreciation—Trucks

34,975 34,975

POINTS: DIFFICULTY:

Page 88

Chapter 10 - Long-Term Assets: Fixed and Intangible 191. An asset was purchased for $58,000 and originally estimated to have a useful life of 10 years with a residual value of $3,000. After two years of straight-line depreciation, it was determined that the remaining useful life of the asset was only two years with a residual value of $2,000. (a) Determine the amount of the annual depreciation for the first two years. (b) Determine the book value at the end of Year 2. (c) Determine the depreciation expense for each of the remaining years after revision. ANSWER:

(a) $5,500 (Cost – Residual Value)/Useful Life = ($58,000 – $3,000)/10 (b) $47,000 [Initial Cost – Total Depreciation for Year 1 and 2 = $58,000 – ($5,500 × 2)] (c) $22,500 [( Book Value at End of Year 2 – Revised Residual Value)/Revised Useful Life = ($47,000 – $2,000)/2]

POINTS: DIFFICULTY:

Page 89

Chapter 10 - Long-Term Assets: Fixed and Intangible 192. For each of the following fixed assets, determine the depreciation expense for Year 3: Disposal date is N/A if asset is still in use. Method: SL = straight-line; DDB = double-declining-balance Assume the estimated life is five years for each asset. Residual Value

Item

Cost

$40,000

50,000

5,000 Jan. 1, Year 1 Aug. 31,Year 3

60,000

2,000 Oct. 1, Year 3 N/A

DDB

80,000

10,000 Jan. 1, Year 2 Apr. 1, Year 3

DDB

Purchase Date

Disposal Date

$ 4,000 July 1, Year 3 N/A

Depr. Method

Depr. Expense Year 3

ANSWER: Residual Value Purchase Date

Disposal Date

Depr. Depr. Expense Method Year 3

Item

Cost

$40,000 $ 4,000 July 1, Year 3

N/A

$3,600

50,000

5,000 Jan. 1, Year 1

Aug. 31, Year 3

6,000

60,000

2,000 Oct. 1, Year 3

N/A

DDB

6,000

80,000

10,000 Jan. 1, Year 2

Apr. 1, Year 3

DDB

4,800

POINTS: DIFFICULTY:

Page 90

Chapter 10 - Long-Term Assets: Fixed and Intangible 193. Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of five years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods: (a) Straight-line (b) Units-of-activity (1,200 hours first year; 2,250 hours second year) (c) Double-declining-balance

ANSWER:

1st Year (a) $70,000 [($360,000 – $10,000) ÷ 5] (b) $30,000 [($360,000 – $10,000) ÷ 14,000 hours × 1,200] (c) $144,000 ($360,000 × 0.40) 2nd Year (a) $70,000 [($360,000 – $10,000) ÷ 5] (b) $56,250 [($360,000 – $10,000) ÷ 14,000 hours × 2,250] (c) $86,400 [($360,000 – $144,000) × 0.40]

POINTS: DIFFICULTY:

Page 91

Chapter 10 - Long-Term Assets: Fixed and Intangible 194. Machinery is purchased on July 1 of the current fiscal year for $240,000. It is expected to have a useful life of four years, or 25,000 operating hours, and a residual value of $15,000. Compute the depreciation for the last six months of the current fiscal year ending December 31 by each of the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity (used for 1,600 hours during the current year)

ANSWER:

(a) (b) (c)

$28,125 [($240,000 – $15,000) ÷ 4 × 6/12] $60,000 ($240,000 × 0.50 × 6/12) $14,400 [($240,000 – $15,000) ÷ 25,000 hours × 1,600 hours]

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 8:13 AM 195. Determine the depreciation for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $500,000 with an estimated life of five years, and residual value of $50,000, using (a) the doubledeclining-balance method and (b) the straight-line method. Assume a fiscal year ending December 31. ANSWER:

(a) Year of acquisition: $50,000 ($500,000 × 0.40 × 3/12) Following year: $180,000 ($500,000 – $50,000 × 0.40) (b) Year of acquisition: $22,500 [($500,000 – $50,000/5) × 3/12] Following year: $90,000 [($500,000 – $50,000)/5]

POINTS: DIFFICULTY:

Page 92

Chapter 10 - Long-Term Assets: Fixed and Intangible 196. Equipment costing $80,000 with a useful life of 10 years and a residual value of $8,000 has been depreciated for six years by the straight-line method. Assume a fiscal year ending December 31. (a) (b)

What is the book value at the end of the sixth year of use? If early in the seventh year it is estimated that the remaining useful life is five years (instead of four) and the residual value is $6,000, what is the amount of depreciation for the seventh year? (a)

ANSWER:

(b)

($80,000 – $8,000) = $72,000 $72,000/10 = $7,200 $7,200 × 6 = $43,200 $80,000 – $43,200 = $36,800 ($36,800 – $6,000)/5 = $6,160

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 8:16 AM 197. Golden Sales has bought $135,000 in fixed assets on January 1 associated with sales equipment. The residual value of these assets is estimated at $10,000 at the end of their four-year service life. Golden Sales managers want to evaluate the options of depreciation. (a) Compute the annual straight-line depreciation and provide the sample depreciation journal entry to be posted at the end of each of the years. (b) Write the journal entries for each year of the service life for these assets using the double-declining-balance method. ANSWER:

(a) Acquisition cost Less residual value Depreciable value Divided by service life Annual depreciation

$135,000 10,000 $125,000 4 years $ 31,250

Dec. 31 Depreciation Expense—Sales Equipment

31,250

Accumulated Depreciation—Sales Equipment

31,250

(b)$135,000 × 50% = $67,500 ($135,000 – $67,500) × 50% = $33,750 Copyright Cengage Learning. Powered by Cognero.

Page 93

Chapter 10 - Long-Term Assets: Fixed and Intangible ($135,000 – $67,500 – $33,750) × 50% = $16,875 $135,000 – $67,500 – $33,750 – $16,875 – $10,000 = $6,875* *Depreciation cannot bring book value below $10,000 residual. Year 1 Dec. 31 Depreciation Expense—Sales Equipment67,500 Accumulated Depreciation—Sales Equipment 67,500 Year 2 Dec. 31 Depreciation Expense—Sales Equipment33,750 Accumulated Depreciation—Sales Equipment Year 3 Dec. 31

33,750

Depreciation Expense—Sales Equipment16,875 Accumulated Depreciation—Sales Equipment

16,875

Year 4 Dec. 31 Depreciation Expense—Sales Equipment6,875 Accumulated Depreciation—Sales Equipment 6,875

POINTS: DIFFICULTY:

Page 94

Chapter 10 - Long-Term Assets: Fixed and Intangible 198. On July 1, Harding Construction purchases a bulldozer for $228,000. The equipment has an eight-year life with a residual value of $16,000. Harding uses straight-line depreciation. (a) Calculate the depreciation expense and provide the journal entry for the first year ending December 31. (b) Calculate the third year’s depreciation expense and provide the journal entry for the third year ending December 31. (c) Calculate the last year’s depreciation expense and provide the journal entry for the last year. ANSWER:

Annual depreciation is: Acquisition cost Less residual value Depreciable cost Divided by service life in years Annual depreciation

$228,000 16,000 $212,000 8 $ 26,500

(a) First-year depreciation is $26,500 × 6/12 = $13,250 (July through December) 13,250 Dec. 31 Depreciation Expense Accumulated Depreciation

13,250

(b) Journal entry for the third year (It is also the same for all years other than the first and last year.) 26,500 Dec. 31 Depreciation Expense Accumulated Depreciation

26,500

(c) Last year depreciation is $26,500 × 6/12 = $13,250 (January through June) 13,250 Dec 31 Depreciation Expense Accumulated Depreciation

13,250

POINTS: DIFFICULTY:

Page 95

Chapter 10 - Long-Term Assets: Fixed and Intangible 199. On July 1, Hartford Construction purchases a bulldozer for $228,000. The equipment has a nine-year life with a residual value of $16,000. Hartford uses the units-of-activity method of depreciation, and the bulldozer is expected to yield 26,500 operating hours. (a) Calculate the depreciation expense per hour of operation. (b) The bulldozer is operated 1,250 hours in the first year, 2,755 hours in the second year, and 1,225 hours in the third year of operations. Journalize the depreciation expense for each year. ANSWER:

(a) Hourly depreciation is: Acquisition cost Less residual value Depreciable cost Service life in hours Hourly depreciation

$228,000 16,000 $212,000 ÷ 26,500 $ 8

(b) First year: 1,250 hours × $8 per hour = $10,000 Year 1 Depreciation Expense 10,000 Accumulated Depreciation

10,000

Second year: 2,755 hours × $8 per hour = $22,040 Year 2 Depreciation Expense 22,040 Accumulated Depreciation

22,040

Third year: 1,225 hours × $8 per hour = $9,800 Year 3 Depreciation Expense Accumulated Depreciation

9,800

POINTS: DIFFICULTY:

1 Challenging Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 8:28 AM

Page 96

Chapter 10 - Long-Term Assets: Fixed and Intangible 200. Equipment was purchased on January 5, Year 1, at a cost of $90,000. The equipment had an estimated useful life of eight years and an estimated residual value of $8,000. After using the equipment for three years, the useful life was revised to a total of 10 years and the residual value was reduced to $2,004. Determine the straight-line depreciation expense for Year 4 and the following years. ANSWER:

Book value at beginning of Year 4: Cost $90,000 Residual 8,000 Depreciable cost $82,000 Depreciation expense for first 3 years: $82,000/8 = $10,250 $10,250 × 3 = $30,750 Book value Jan. 1, Year 4 = $59,250 Revised depreciation expense calculation: Book value at beginning of Year 4 $59,250 Less revised residual value 2,004 Remaining depreciable amount $57,246 Divided by remaining life 7 Depreciation expense for Year 4 $ 8,178

POINTS: DIFFICULTY:

Page 97

Chapter 10 - Long-Term Assets: Fixed and Intangible 201. A copy machine acquired on May 1 with a cost of $2,545 has an estimated useful life of three years. Assuming that it will have a residual value of $445, determine the depreciation for the first and second year by the straight-line method. Round your answers to the nearest whole dollar. ANSWER:

Straight-Line Depreciation = (Cost – Estimated Residual Value) ÷ Estimated Life Straight-Line Depreciation = ($2,545 – $445) ÷ 3 Straight-Line Depreciation = $700 per year First Year = $467 ($700 × 8/12) Second Year = $700

POINTS: DIFFICULTY:

Page 98

Chapter 10 - Long-Term Assets: Fixed and Intangible 202. A copy machine acquired with a cost of $1,410 has an estimated useful life of four years. It is also expected to have a useful operating life of 13,350 copies. Assuming that it will have a residual value of $75, determine the depreciation for the first year by the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity method (4,500 copies were made the first year)

ANSWER:

Straight-Line Depreciation = (Cost – Estimated Residual Value)/Estimated Life Straight-Line Depreciation = ($1,410 – $75)/4 Straight-Line Depreciation = $333.75 per year (b) Double-Declining-Balance = $705, determined as follows: (a)

Year 1

Cost $1,410

Book Value at Beginning of Year $1,410

Rate 50%*

Depreciation for Year $705

*Rate = (100%/Life) × 2 Rate = 1/4 × 2 Rate = 0.50 (c)

Units-of-Activity = (Cost – Estimated Residual Value)/Estimated Copies Units-of-Activity = ($1,410 – $75)/13,350 Units-of-Activity = $0.10 per copy First-Year Depreciation = $450 ($0.10 × 4,500)

POINTS: DIFFICULTY:

Page 99

Chapter 10 - Long-Term Assets: Fixed and Intangible 203. On July 1, Andrew Company purchased equipment at a cost of $150,000 that has a depreciable cost of $120,000 and an estimated useful life of three years or 60,000 hours. Using straight-line depreciation, prepare the journal entry to record depreciation expense for (a) the first year, (b) the second year, and (c) the last year. ANSWER:

$120,000 ÷ 3 years = $40,000 per full year $40,000 × 6/12 = $20,000 for first and final (partial) years (a) Depreciation Expense 20,000 Accumulated Depreciation 20,000 (b) Depreciation Expense 40,000 Accumulated Depreciation 40,000 (c) Depreciation Expense 20,000 Accumulated Depreciation 20,000

POINTS: DIFFICULTY:

Page 100

Chapter 10 - Long-Term Assets: Fixed and Intangible 204. A copy machine acquired on July 1 with a cost of $1,450 has an estimated useful life of four years. Assuming that it will have a residual value of $250, determine the depreciation for the first year by the double-declining-balance method. ANSWER:

First-Year Depreciation = $362.50 ($725 × 6/12)

Year 1

Cost $1,450

Book Value at Beginning of Year $1,450

Rate 50%*

Depreciation for Year $725.00

*Rate = (100%/Life) × 2 Rate = 1/4 × 2 Rate = 0.50 POINTS: DIFFICULTY:

Page 101

Chapter 10 - Long-Term Assets: Fixed and Intangible 205. Champion Company purchased and installed carpet in its new general offices on March 31 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value. (a)

Prepare the journal entries necessary for recording the purchase of the new carpet.

(b)

Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet assuming that Champion Company uses the straight-line method.

ANSWER:

(a) Mar. 31 Carpet Cash

18,000 18,000

(b) Dec. 31 Depreciation Expense Accumulated Depreciation Carpet depreciation [($18,000/15 years) × 9/12].

900 900

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:39 AM 206. Computer equipment (office equipment) purchased 6½ years ago for $170,000, with an estimated life of eight years and a residual value of $10,000, is now sold for $60,000 cash. (Appropriate entries for depreciation had been made for the first six years of use.) Journalize the following entries: (a) (b) (c)

Record the depreciation for the one-half year prior to the sale, using the straight-line method. Record the sale of the equipment. Assuming that the equipment had been sold for $25,000 cash, prepare the entry to record the sale.

ANSWER:

Depreciation Expense—Office Equipment Accumulated Depreciation— Office Equipment [($170,000 – $10,000)/8]/2 = $10,000

10,000

(b) Cash Accumulated Depreciation—Office Equipment Office Equipment Gain on Sale of Equipment

60,000 130,000

(a)

10,000

170,000 20,000 Page 102

Chapter 10 - Long-Term Assets: Fixed and Intangible Accumulated Depreciation at Time of Sale = [($170,000 – $10,000)/8] × 6.5 = $130,000 Book Value at Time of Sale = $170,000 – $130,000 = $40,000 Gain on Sale = Selling Price – Book Value of Asset at Time of Sale = $60,000 – $40,000 = $20,000 (c) Cash 25,000 Accumulated Depreciation—Office 130,000 Equipment Loss on Sale of Equipment 15,000 Office Equipment 170,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 9:27 PM

Page 103

Chapter 10 - Long-Term Assets: Fixed and Intangible 207. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was depreciated using the straight-line method based on an estimated useful life of six years and an estimated residual value of $7,500. (a) What was the depreciation expense for the first year? (b) Assuming the equipment was sold at the end of the second year for $59,000, determine the gain or loss on sale of the equipment. (c) Journalize the entry to record the sale. ANSWER:

(a) $11,250 [(Cost – Residual Value)/Useful Life = ($75,000 – $7,500)/6] (b) $6,500 gain [Accumulated Depreciation at End of Second Year = $11,250 × 2 = $22,500 Book Value at End of Second Year = $75,000 – $22,500 = $52,500 Gain on Sale = Selling Price – Book Value of Asset at End of Second Year = $59,000 – $52,500 = $6,500] (c) Cash 59,000 Accumulated Depreciation 22,500 Equipment 75,000 Gain on Sale Equipment 6,500

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 8:47 PM

Page 104

Chapter 10 - Long-Term Assets: Fixed and Intangible 208. Equipment acquired on January 2, Year 1, at a cost of $525,000 has an estimated useful life of eight years and an estimated residual value of $45,000. Required (a) What is the annual amount of depreciation for the first three years, assuming the straightline method of depreciation is used? (b) What is the book value of the equipment on January 1, Year 4? (c) Assuming that the equipment is sold on January 2, Year 4, for $326,000, journalize the entry to record the sale. (d) Assuming that the equipment is sold on January 2, Year 4, for $394,000, journalize the entry to record the sale. ANSWER:

(a) Year 1 depreciation expense: $60,000 [($525,000 – $45,000)/8] Year 2 depreciation expense: $60,000 Year 3 depreciation expense: $60,000 (b) $345,000 [$525,000 – ($60,000 × 3)] (c) Cash

326,000

Accumulated Depreciation—Equipment

180,000

Loss on Sale of Equipment

19,000 525,000

Equipment

(d) Cash Accumulated Depreciation—Equipment

394,000 180,000

Equipment

525,000

Gain on Sale of Equipment

49,000

POINTS: DIFFICULTY:

Page 105

Chapter 10 - Long-Term Assets: Fixed and Intangible 209. Williams Company acquired machinery on July 1, Year 1, at a cost of $130,000. The estimated useful life of the machinery was 10 years, and the estimated residual value was $10,000. Williams uses the double-declining-balance method of depreciation. On October 1, Year 4, Williams sold the equipment for $75,000. (a) Record the journal entry for the depreciation on this machinery for Year 4. (b) Record the journal entry for the sale of the machinery. ANSWER:

(a) $13,000 ($130,000 × 0.20 × 6/12)

(b)

Depreciation Expense Accumulated Depreciation—Machinery

13,000

Cash Accumulated Depreciation—Machinery Machinery Gain on Sale of Machinery

75,000 66,352

13,000

130,000 11,352

POINTS: DIFFICULTY:

Page 106

Chapter 10 - Long-Term Assets: Fixed and Intangible 210. Solare Company acquired mineral rights for $60,000,000. The diamond deposit is estimated at 6,000,000 tons. During the current year, 2,300,000 tons were mined and sold. (a) Determine the depletion rate. (b) Determine the amount of depletion expense for the current year. (c) Journalize the adjusting entry to recognize the depletion expense. ANSWER:

(a) $10 per ton ($60,000,000/6,000,000 tons) (b) $23,000,000 ($10 × 2,300,000 tons) (c) Dec. 31 Depletion Expense Accumulated Depletion

23,000,000 23,000,000

Depletion of mineral deposit. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 9:26 AM

Page 107

Chapter 10 - Long-Term Assets: Fixed and Intangible 211. Carter Co. acquired drilling rights for $18,550,000. The oil deposit is estimated at 74,200,000 gallons. During the current year, 6,000,000 gallons were drilled. Journalize the adjusting entry at December 31 to recognize the depletion expense. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date Dec. 31

Description Depletion Expense

Post. Ref.

Debit

Credit

1,500,000*

Accumulated Depletion

1,500,000

*Depletion Rate = Cost/Estimated Size Depletion Rate = $18,550,000/74,200,000 Depletion Rate = $0.25 per gallon Depletion Expense = Depletion Rate × Quantity Extracted Depletion Expense = $0.25 × 6,000,000 gallons Depletion Expense = $1,500,000 POINTS: DIFFICULTY:

Page 108

Chapter 10 - Long-Term Assets: Fixed and Intangible 212. Chasteen Company acquired mineral rights for $9,100,000. The mineral deposit is estimated at 65,000,000 tons. During the current year, 18,375,000 tons were mined and sold. Required (a) Determine the amount of depletion expense for the current year. (b) Journalize the adjusting entry to recognize the depletion expense. ANSWER:

(a) $9,100,000/65,000,000 tons = $0.14 depletion per ton 18,375,000 × $0.14 = $2,572,500 depletion expense (b) Depletion Expense Accumulated Depletion Depletion of mineral deposit.

2,572,500 2,572,500

POINTS: DIFFICULTY:

Page 109

Chapter 10 - Long-Term Assets: Fixed and Intangible 213. On December 31, Bowman Company estimated that goodwill of $80,000 was impaired. On June 1, a patent with an estimated useful economic life of 10 years was acquired for $252,000. Required (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. ANSWER:

(a) Dec. 31 Loss from Impaired Goodwill

80,000 80,000

Goodwill

(b) Dec.31 Amortization Expense—Patents

14,700

Patents

14,700

Amortized Patent Rights = [($252,000/10) × 7/12] = $14,700 POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 8:53 PM

Page 110

Chapter 10 - Long-Term Assets: Fixed and Intangible 214. On December 31, it was estimated that goodwill of $65,000 was impaired. On July 1, a patent with an estimated useful economic life of 10 years was acquired for $60,000. (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. ANSWER:

(a) Loss from Impaired Goodwill 65,000 Goodwill 65,000 (b) Amortization Expense—Patents 3,000 Patents 3,000 Annual Patent Amortization = Acquisition Cost/Useful Life = $60,000/10 = $6,000 Amortization expense from July 1 to December 31 = $6,000/2 = $3,000

POINTS: DIFFICULTY:

Page 111

Chapter 10 - Long-Term Assets: Fixed and Intangible 215. On July 1, Sterns Co. acquired patent rights for $36,000. The patent has a useful life of six years and a legal life of 15 years. Journalize the adjusting entry on December 31 to recognize the amortization.

Date

Description

Journal Post. Ref.

Debit

Credit

ANSWER: Journal Post. Ref.

Date Description Debit Credit Dec. 31 Amortization Expense 3,000 3,000 Patents Annual Patent Amortization = Acquisition Cost/Useful Life = $36,000/6 = $6,000 Amortization expense from July 1 to December 31 = $6,000/2 = $3,000 POINTS: DIFFICULTY:

Page 112

Chapter 10 - Long-Term Assets: Fixed and Intangible 216. Identify the following as a fixed asset (FA), or intangible asset (IA), natural resource (NR), or none of these (N). (a) Computer (b) Patent (c) Oil reserve (d) Goodwill (e) U.S. Treasury note (f) Land used for employee parking (g) Gold mine

ANSWER:

FA IA NR N

(a) (f) (b) (d) (c) (g) (e)

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCT.WARD.18.10-04 - 10-04 ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/8/2017 8:57 PM 217. The following information was taken from a recent annual report of Harrison Company (in millions): Current Year Preceding Year Land and buildings $726 $361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Other fixed assets related to leases 760 569 Accumulated depreciation and amortization 894 644 Required (a) Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any. (b)

Would you normally expect the book value of fixed assets to increase or decrease during the year?

ANSWER:

(a) Property, plant, and equipment (in millions):

CurrentPreceding Year Copyright Cengage Learning. Powered by Cognero.

Year Page 113

Chapter 10 - Long-Term Assets: Fixed and Intangible

$ 726

$ 361

Machinery, equipment, and internal-use software

595

470

Office furniture and equipment

Other fixed assets related to leases

760

569

$2,175

$1,481

894

644

$1,281

$ 837

Land and buildings

Less accumulated depreciation Book value

A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Harrison purchased $694 million ($2,175 – $1,481) of additional fixed assets, which was offset by the additional depreciation expense of $250 million ($894 – $644) taken during the current year. (b) The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 9:50 AM

Page 114

Chapter 10 - Long-Term Assets: Fixed and Intangible 218. Fill in the missing numbers using the formula for fixed asset turnover:

Sales Beginning fixed assets Ending fixed assets Fixed asset turnover

Company A Company B Company C Company D $5,000,000 $720,000 $900,000 ? $450,000 $275,000 ? $380,000 $800,000 ? $310,000 $420,000 ? 2.4 3.0 2.6

ANSWER: Company Company Company Company A B C D Sales

$5,000,000 $720,000 $900,000$1,040,000

Beginning fixed assets

$450,000 $275,000 $290,000 $380,000

Ending fixed assets

$800,000 $325,000 $310,000 $420,000

Fixed asset turnover

8.0

2.4

3.0

2.6

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 10:10 AM

Page 115

Chapter 10 - Long-Term Assets: Fixed and Intangible 219. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Current Year

Prior Year

$2,595,600

$2,409,498

Beginning of year

$901,070

$820,000

End of year

829,330

901,070

Sales Fixed assets (net):

(a) Determine the fixed asset turnover for the current and prior years. (b) Does the change in fixed asset turnover from the prior year to the current year indicate a favorable or unfavorable trend? ANSWER: Current Year Fixed assets: Beginning of year End of year Average fixed assets

Prior Year

$901,070 829,330 $865,200

(a) Sales divided by average fixed assets: Current year ($2,595,600/$865,200) Prior year ($2,409,498/$860,535)

$820,000 901,070 $860,535

3.0 2.8

(b) The change in fixed asset turnover indicates an increase in efficiency of using fixed assets to generate sales. POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 10:13 AM

Page 116

Chapter 10 - Long-Term Assets: Fixed and Intangible 220. On the first day of the fiscal year, a new walk-in cooler with a list price of $58,000 was acquired in exchange for an old cooler and $44,000 cash. The old cooler had a cost of $25,000 and accumulated depreciation of $16,000. Assume the transaction has commercial substance. (a) Determine the gain to be recorded on the exchange. (b) Journalize the entry to record the exchange. ANSWER:

(a) $58,000

List price $ 9,000

Book value of old cooler

44,000

Cash paid

$ 5,000

Gain on exchange

(b) Equipment (new) Accumulated Depreciation Equipment (old) Gain on Exchange of Equipment

53,000

58,000 16,000

Cash

25,000 5,000 44,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 10:21 AM

Page 117

Chapter 10 - Long-Term Assets: Fixed and Intangible 221. On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000. Assuming the exchange has commercial substance, journalize the entries to record: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1. ANSWER:

(a) Depreciation Expense—Equipment Accumulated Depreciation—Equipment Equipment depreciation ($20,000 × 9/12).

15,000

(b) Accumulated Depreciation—Equipment Equipment Loss on Exchange of Equipment Equipment Cash

235,000 458,000 9,000

15,000

336,000 366,000

POINTS: DIFFICULTY:

Page 118

Chapter 10 - Long-Term Assets: Fixed and Intangible 222. Machinery acquired at a cost of $80,000 and on which there is accumulated depreciation of $55,000 (including depreciation for the current year to date) is exchanged for similar machinery. Assume that the transaction has commercial substance. For financial reporting purposes, present entries to record the exchange of the machinery under each of the following assumptions: (a) Price of new, $120,000; trade-in allowance on old, $4,000; balance paid in cash. (b) Price of new, $120,000; trade-in allowance on old, $34,000; balance paid in cash. 55,000

(a) Accumulated Depreciation—Machinery

ANSWER:

Machinery

120,000

Loss on Disposal of Fixed Assets

21,000

Machinery

80,000

Cash

116,000 55,000

(b) Accumulated Depreciation—Machinery

120,000

Machinery Machinery

80,000

Gain on Exchange of Machinery

9,000

Cash

86,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/1/2017 8:40 AM 223. Equipment acquired at a cost of $126,000 has a book value of $42,000. Journalize the disposal of the equipment under the following independent assumptions. (a) The equipment had no market value and was discarded. (b) The equipment is sold for $54,000. (c) The equipment is sold for $24,000. (d) The equipment is traded in for a similar asset. The list price of the new equipment is $63,000. The buyer gave no cash in the exchange. The transaction lacks commercial substance.

Date

Description

Journal Post. Ref.

Debit

Credit

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Chapter 10 - Long-Term Assets: Fixed and Intangible

ANSWER: Journal Date (a)

Description Loss on Disposal of Equipment Accumulated Depreciation—Equipment

Post. Ref.

Debit Credit 42,000 84,000

Equipment

(b)

Cash Accumulated Depreciation—Equipment

126,000

54,000 84,000

Equipment

126,000

Gain on Sale of Equipment

(c)

Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment

12,000

24,000 84,000 18,000

Equipment

(d)

Equipment (new)

126,000

42,000

Page 120

Chapter 10 - Long-Term Assets: Fixed and Intangible Accumulated Depreciation—Equipment Equipment (old)

84,000 126,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:43 PM DATE MODIFIED: 2/2/2017 10:40 AM

Page 121

Chapter 11 - Current Liabilities and Payroll True / False 1. Receiving payment prior to delivering goods or services causes a current liability to be incurred. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:31 PM 2. All long-term liabilities eventually become current liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 11 - Current Liabilities and Payroll 3. For a current liability to exist, the liability must be due usually within a year and must be paid out of current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/27/2017 9:34 AM 4. The borrower issues a note payable to a creditor. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:37 PM

Page 2

Chapter 11 - Current Liabilities and Payroll 5. Notes payable may be issued to creditors to satisfy previously created accounts payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:38 PM 6. Interest expense is reported in the Operating expense section of the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 11 - Current Liabilities and Payroll 7. An interest-beating note is a loan in which the lender deducts interest from the amount loaned before the money is advanced to the borrower. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:41 PM 8. The amount borrowed is equal to the face amount of the note on an interest-bearing note payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 11 - Current Liabilities and Payroll 9. The amount of money a borrower receives from the lender is called the discount rate. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:44 PM 10. The proceeds of a discounted note are equal to the face value of the note. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 11 - Current Liabilities and Payroll 11. The discount on a note payable is charged to an account that has a normal credit balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:46 PM 12. The proceeds from discounting a $20,000, 60-day note payable at 6% is $20,200. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Proceeds = $20,000 − ($20,000 × 6% × 60 ÷ 360) = $19,800 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:50 PM

Page 6

Chapter 11 - Current Liabilities and Payroll 13. Amounts withheld from each employee for social security and Medicare vary by state. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:51 PM 14. An employee's take-home pay is equal to gross pay less all voluntary deductions. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:53 PM

Page 7

Chapter 11 - Current Liabilities and Payroll 15. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s federal income taxes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 3:55 PM 16. Taxes deducted from an employee's earnings to finance social security and Medicare benefits are called FICA taxes. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 11 - Current Liabilities and Payroll 17. Generally, all deductions made from an employee's gross pay are required by law. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:01 PM 18. Payroll taxes are based on the employee's net pay. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:06 PM

Page 9

Chapter 11 - Current Liabilities and Payroll 19. Most employers are required to withhold federal unemployment taxes from employee earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:08 PM 20. FICA tax is a payroll tax that is paid only by employers. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:09 PM

Page 10

Chapter 11 - Current Liabilities and Payroll 21. Medicare taxes are paid by both the employee and the employer. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:11 PM 22. Federal unemployment taxes are paid by the employer and the employee. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:13 PM

Page 11

Chapter 11 - Current Liabilities and Payroll 23. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:15 PM 24. Federal income taxes are subject to a maximum amount per employee per year. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:17 PM

Page 12

Chapter 11 - Current Liabilities and Payroll 25. Federal unemployment compensation tax becomes an employer's liability at the time the employee is paid. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:19 PM 26. Form W-2 is called the Wage and Tax Statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 11 - Current Liabilities and Payroll 27. FICA tax becomes a liability to the federal government at the time an employee's payroll is prepared. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:23 PM 28. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 11 - Current Liabilities and Payroll 29. Federal income taxes withheld increase the employer's payroll tax expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:25 PM 30. The use of a separate payroll bank account is not an advantageous control, because it creates more complexity in reconciliation functions for a company and invites theft. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:27 PM

Page 15

Chapter 11 - Current Liabilities and Payroll 31. Employers are required to compute and report payroll taxes on a calendar-year basis, even if a different fiscal year is used for financial reporting and income tax purposes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 4:29 PM 32. Payroll taxes levied against employers become an employer liability at the time the employee wages are incurred. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 11 - Current Liabilities and Payroll 33. Most employers use payroll checks drawn on a special bank account for paying the payroll. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 5:59 PM 34. The payroll register is a multicolumn form used to assemble the payroll-related data for all employees. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 11 - Current Liabilities and Payroll 35. The total net pay for a period is determined from the payroll register. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:01 PM 36. Internal controls for cash payments apply to payrolls. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:03 PM

Page 18

Chapter 11 - Current Liabilities and Payroll 37. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:05 PM 38. Depending on when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a long-term or a current liability. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:06 PM

Page 19

Chapter 11 - Current Liabilities and Payroll 39. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the second year as the vacations are taken by the employees. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:07 PM 40. One of the more popular defined contribution plans is the 401k plan. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 41. A defined contribution plan promises employees a fixed annual pension benefit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 6:09 PM 42. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 11 - Current Liabilities and Payroll 43. The accounting for defined benefit plans is usually very easy and straightforward. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 7:06 PM 44. During the first year of operations, a company granted warranties on its products at an estimated cost of $8,500. The product warranty expense should be recorded in the years of the expenditures to repair the products covered by the warranty payments. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 7:08 PM

Page 22

Chapter 11 - Current Liabilities and Payroll 45. Obligations that may arise from past transactions only if certain events occur in the future are contingent liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 7:09 PM 46. In order to be a recorded contingent liability, the liability must be possible and easily estimated. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 23

Chapter 11 - Current Liabilities and Payroll 47. The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 7:12 PM Multiple Choice 48. Current liabilities are due a. but not receivable for more than one year b. but not payable for more than one year c. and receivable within one year d. and payable within one year ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 49. Notes may be issued a. when assets are purchased b. to creditors to temporarily satisfy an account payable created earlier c. when borrowing money d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/23/2017 7:17 PM 50. On June 8, Smith Technologies issued a $75,000, 6%, 140-day note payable to Johnson Company. What is the due date of the note? a. October 28 b. October 27 c. October 26 d. October 25 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Due Date of Note = Invoice Date of June 8 + 140 days = October 26 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:18 AM

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Chapter 11 - Current Liabilities and Payroll 51. On June 8, Williams Company issued an $80,000, 5%, 120-day note payable to Brown Industries. Assuming a 360day year, what is the maturity value of the note? a. $82,600 b. $84,000 c. $81,333 d. $88,200 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Maturity Value of Note = $80,000 + ($80,000 × 5% × 120 ÷ 360) = $81,333 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:20 AM 52. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of Jones ends on July 31. Using the 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal year? a. $700 b. $4,200 c. $307 d. $1,400 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Interest Expense Recognized = ($80,000 × 6% × 120 ÷ 360) × 23/120 = $307 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:21 AM

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Chapter 11 - Current Liabilities and Payroll 53. On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using the 360-day year, what is the amount of interest revenue (rounded) recognized by Garcia in the following year? a. $700 b. $1,600 c. $1,062 d. $4,200 ANSWER: RATIONALE:

c Amount of Revenue Recognized = [($84,000 × 5% × 120 ÷ 360) × (120 – 29)/120] = $1,062 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:22 AM 54. On May 18, Rodriguez Co. issued an $84,000, 6%, 120-day note payable on an overdue account payable to Wilson Company. Assume that the fiscal year of Rodriguez ends on June 30. Which of the following relationships is true? a. Rodriguez is the creditor and credits Accounts Receivable. b. Wilson is the creditor and debits Accounts Receivable. c. Wilson is the borrower and credits Accounts Payable. d. Rodriguez is the borrower and debits Accounts Payable. ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 55. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a a. debit to Interest Payable for $750 b. debit to Interest Expense for $750 c. credit to Cash for $50,000 d. credit to Cash for $54,500 ANSWER: RATIONALE:

b Interest Expense = $50,000 × 9% × 60 ÷ 360 = $750 The entry to record the payment of the note should include a debit to Notes Payable for $50,000, a debit to Interest Expense for $750, and a credit to Cash for $50,750. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:25 AM 56. When a borrower receives the face amount of a discounted note less the discount, the amount is known as the a. note proceeds b. note discount c. note deferred interest d. note principal ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:26 AM

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Chapter 11 - Current Liabilities and Payroll 57. Assuming a 360-day year, the interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable of $100,000 is a. $6,000 b. $1,500 c. $500 d. $3,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Interest Charged = $100,000 × 6% × 90 ÷ 360 = $1,500 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:27 AM 58. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, the total payment will be a. $51,125 b. $54,500 c. $1,125 d. $4,500 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Total Payment = $50,000 + ($50,000 × 9% × 90 ÷ 360) = $51,125 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:27 AM

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Chapter 11 - Current Liabilities and Payroll 59. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds was a. 6.25% b. 10% c. 10.26% d. 9.75% ANSWER: RATIONALE:

b Discount Amount = $50,000 – $48,750 = $1,250 Discount rate = ($1,250 ÷ $50,000) × (360 ÷ 90) = 10% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:28 AM 60. Anderson Co. issued a $50,000, 60-day, discounted note to National Bank. The discount rate is 6%. At maturity, assuming a 360-day year, the borrower will pay a. $53,000 b. $50,500 c. $50,000 d. $49,500 ANSWER: RATIONALE:

c Maturity Amount = $50,000 The borrower must repay the face amount of the note on the due date. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:29 AM

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Chapter 11 - Current Liabilities and Payroll 61. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360-day year, the cash proceeds to Chang Co. are a. $49,750 b. $47,000 c. $49,000 d. $51,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Cash Proceeds = $50,000 – ($50,000 × 6% × 120 ÷ 360) = $49,000 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:30 AM 62. The journal entry to record the issuance of a note for the purpose of converting an existing account payable would be a. debit Cash; credit Accounts Payable b. debit Accounts Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Notes Payable ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 63. The journal entry used to record the issuance of an interest-bearing note for the purpose of borrowing funds for the business is a. debit Accounts Payable; credit Notes Payable b. debit Cash; credit Notes Payable c. debit Notes Payable; credit Cash d. debit Cash and Interest Expense; credit Notes Payable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:31 AM 64. The journal entry used to record the issuance of a discounted note for the purpose of borrowing funds for the business is a. debit Cash and Interest Expense; credit Notes Payable b. debit Cash and Interest Payable; credit Notes Payable c. debit Accounts Payable; credit Notes Payable d. debit Notes Payable; credit Cash ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:32 AM

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Chapter 11 - Current Liabilities and Payroll 65. The journal entry used to record the payment of a discounted note is a. debit Notes Payable and Interest Expense; credit Cash b. debit Notes Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Cash ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:33 AM 66. The journal entry to record the payment of an interest-bearing note is a. debit Cash; credit Notes Payable b. debit Accounts Payable; credit Cash c. debit Notes Payable and Interest Expense; credit Cash d. debit Notes Payable and Interest Receivable; credit Cash ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:34 AM

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Chapter 11 - Current Liabilities and Payroll 67. A current liability is a debt that is reasonably expected to be paid a. between 6 and 18 months b. out of currently recognized revenues c. within one year d. out of cash currently on hand ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 68. Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, ninemonth note. The entry made by Guarantee Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense Cash Notes Payable

12,000 138,000

b. Cash Notes Payable

150,000

c. Cash Interest Expense Notes Payable

162,000

150,000

d. Notes Payable 120,000 Interest Payable 7,200 Cash Interest Expense

12,000 150,000

120,000 7,200

ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:35 AM

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Chapter 11 - Current Liabilities and Payroll 69. The journal entry to record the conversion of a $6,300 account payable to a note payable would be a. Cash Notes Payable

6,300 6,300

b. Notes Receivable 6,300 Notes Payable

6,300

c. Notes Payable Cash

6,300

d. Accounts Payable 6,300 Notes Payable 6,300 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:36 AM 70. Current liabilities are a. due and receivable within one year b. due and to be paid out of current assets within one year c. due, but not payable for more than one year d. payable if a possible subsequent event occurs ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:37 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll 71. Which of the following would most likely be classified as a current liability? a. two-year note payable b. bond payable c. mortgage payable d. unearned rent ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:37 AM 72. Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, total payment will be a. $21,000 b. $1,000 c. $20,250 d. $250 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Total Payment = $20,000 + ($20,000 × 5% × 90 ÷ 360) = $20,250 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:38 AM

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Chapter 11 - Current Liabilities and Payroll 73. The current portion of long-term debt should a. be classified as a long-term liability b. not be separated from the long-term portion of debt c. be paid immediately d. be reclassified as a current liability ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:39 AM 74. On January 5, Thomas Company, which follows a calendar year, issued $1,000,000 of notes payable, of which $250,000 is due on January 1 each of the next four years. The proper balance sheet presentation on December 31 is a. Current liabilities, $1,000,000 b. Current liabilities, $250,000; Long-term debt, $750,000 c. Long-term debt, $1,000,000 d. Current liabilities, $750,000; Long-term debt, $250,000 ANSWER: RATIONALE:

b Current Liabilities = $250,000; Long-Term Debt = $1,000,000 – $250,000 = $750,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:40 AM

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Chapter 11 - Current Liabilities and Payroll 75. Proper payroll accounting methods are important for a business for all of the following reasons except a. good employee morale requires timely and accurate payroll payments b. payroll is subject to various federal and state regulations c. to help a business with cash flow problems by delayed payments of payroll taxes to federal and state agencies d. payroll and related payroll taxes have a significant effect on the net income of most businesses ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:40 AM 76. The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n) a. payroll expense b. contra account c. asset d. liability ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 77. Which of the following is not a determinant in calculating federal income taxes withheld from an individual's pay? a. filing status b. type of earnings c. gross pay d. number of exemptions ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:44 AM 78. Which of the following would be used to compute the federal income taxes to be withheld from an employee's earnings? a. FICA tax rate b. wage and tax statement c. FUTA tax rate d. wage bracket and withholding table ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 79. Which of the following taxes would be deducted in determining an employee's net pay? a. FUTA taxes b. SUTA taxes c. FICA taxes d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:46 AM 80. Which of the following taxes are employers required to withhold from employees? a. FICA tax b. FICA tax and state and federal unemployment tax c. state unemployment tax d. federal unemployment tax ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:46 AM

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Chapter 11 - Current Liabilities and Payroll 81. Thomas Martin receives an hourly wage rate of $40, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the gross pay for Martin? a. $449 b. $1,730 c. $2,080 d. $1,581 ANSWER: RATIONALE:

c Gross Pay for Martin = Earnings at Regular Rate + Earnings at Overtime Rate = (40 × $40) + (8 × $40 × 1.5) = $2,080 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:47 AM

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Chapter 11 - Current Liabilities and Payroll 82. Martin Jackson receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to Jackson? a. $1,470.00 b. $1,009.75 c. $1,097.95 d. $460.25 ANSWER: RATIONALE:

b Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate Gross Pay = [($30 × 40) + ($30 × 1.5 × 6)] = $1,470 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) Net Pay = $1,470 – [$350 + ($1,470 × 6.0%) + ($1,470 × 1.5%)] = $1,009.75 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:48 AM

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Chapter 11 - Current Liabilities and Payroll 83. The total earnings of an employee for a payroll period is referred to as a. take-home pay b. pay net of taxes c. net pay d. gross pay ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:49 AM 84. Most employers are levied a tax on payrolls for a. sales tax b. medical insurance premiums c. federal unemployment compensation tax d. union dues ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 85. Which of the following will have no effect on an employee’s take-home pay? a. social security tax b. unemployment tax c. marital status d. number of exemptions claimed ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:50 AM 86. Sadie White receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $300; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to White? a. $1,443.00 b. $1,143.00 c. $1,260.00 d. $1,000.00 ANSWER: RATIONALE:

b Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate = ($30 × 40) + ($30 × 1.5 × 8) = $1,560 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $1,560 – [$300 + ($1,560 × 6.0%) + ($1,560 × 1.5%)] = $1,143.00 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:51 AM

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Chapter 11 - Current Liabilities and Payroll 87. Davis and Thompson have earnings of $850 each. The social security tax rate is 6.0%, and the Medicare tax rate is 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period? a. $102.00 b. $127.50 c. $96.00 d. $25.50 ANSWER: RATIONALE:

b Earnings Subject to 6.0% Social Security Tax and 1.5% Medicare Tax = $850 × 2 = $1,700 Total FICA Tax = Social Security Tax + Medicare Tax Total FICA Tax = ($1,700 × 6.0%) + ($1,700 × 1.5%) = $102.00 + $25.50 = $127.50 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:52 AM

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Chapter 11 - Current Liabilities and Payroll 88. The following totals for the month of June were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings

$14,000 1,050 2,600 1,000

The entry to record the payment of net pay would include a a. debit to Salaries Payable for $14,000 b. debit to Salaries Payable for $9,350 c. credit to Salaries Expense for $9,350 d. credit to Salaries Payable for $9,350 ANSWER: RATIONALE:

b Net Pay = Salaries Expenses – Social Security and Medicare Taxes Withheld – Income Taxes Withheld – Retirement Savings = $14,000 – $1,050 – $2,600 – $1,000 = $9,350 The entry to record the payment of net pay would include a debit to Salaries Payable for $9,350. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:53 AM

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Chapter 11 - Current Liabilities and Payroll 89. Which of the following is included in the employer's payroll taxes? a. SUTA tax b. FUTA tax c. social security tax d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:54 AM 90. Which of the following is required to be withheld from an employee's gross pay? a. both federal and state unemployment compensation taxes b. only federal unemployment compensation tax c. only federal income tax d. only state unemployment compensation tax ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:55 AM

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Chapter 11 - Current Liabilities and Payroll 91. Each year, there is a ceiling for the amount that is subject to all of the following except a. social security tax b. federal income tax c. federal unemployment tax d. state unemployment tax ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:56 AM

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Chapter 11 - Current Liabilities and Payroll 92. Lee Company has the following information for the pay period of December 15–31: Gross payroll Social security rate Medicare rate

$16,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$4,000 0.8% 5.4%

Assuming no employees are subject to ceilings for taxes on their earnings, Salaries Payable would be recorded for a. $16,000 b. $9,808 c. $10,800 d. $11,040 ANSWER: RATIONALE:

c Salaries Payable = Gross Payroll – Social Security Tax – Medicare Tax – Federal Income Tax Salaries Payable = $16,000 – ($16,000 × 6.0%) – ($16,000 × 1.5%) – $4,000 = $10,800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:57 AM

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Chapter 11 - Current Liabilities and Payroll 93. Payroll taxes levied against employees become liabilities a. the first of the following month b. when the payroll is paid to employees c. when data are entered in a payroll register d. at the end of an accounting period ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:58 AM 94. Payroll entries are made with data from the a. wage and tax statement b. employee's earnings record c. employer's quarterly federal tax return d. payroll register ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:59 AM

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Chapter 11 - Current Liabilities and Payroll 95. Which of the following forms is typically given to employees at the end of the calendar year so that employees can file their individual income tax forms? a. Employee’s Withholding Allowance Certificate (Form W-4) b. Wage and Tax Statement (Form W-2) c. Employer's Quarterly Federal Tax Return (Form 941) d. 401k plans ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 8:59 AM 96. The employee's earnings record would contain which of the following data that the payroll register would probably not contain? a. deductions b. payment c. earnings d. cumulative earnings ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 97. The detailed record indicating the data for each employee for each payroll period and the cumulative total earnings for each employee is called the a. payroll register b. payroll check c. employee's earnings record d. employer's earnings record ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:01 AM

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Chapter 11 - Current Liabilities and Payroll 98. An employee receives an hourly wage rate of $15, with time-and-a-half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $120; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $568.74 b. $601.50 c. $660.00 d. $574.90 ANSWER: RATIONALE:

b Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate Gross Pay = ($15 × 40) + ($15 × 1.5 × 8) = $780 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) Net Pay = $780 – [$120 + ($780 × 6.0%) + ($780 × 1.5%)] = $601.50 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:02 AM

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Chapter 11 - Current Liabilities and Payroll Use this information for Magnum Company to answer the following questions. The following totals for the month of April were taken from the payroll register of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes

$12,000 900 2,500 450 32 216

99. The journal entry to record the monthly payroll on April 30 would include a a. credit to Salaries Payable for $8,150 b. debit to Salaries Expense for $7,902 c. debit to Salaries Payable for $8,150 d. debit to Salaries Payable for $7,902 ANSWER: RATIONALE:

a Salaries Payable = Gross Pay – (FICA Tax Withheld + Income Taxes Withheld + Medical Insurance Deductions) = $12,000 – ($900 + $2,500 + $450) = $8,150 The journal entry to record the monthly payroll on April 30 would include a credit to Salaries Payable for $8,150. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Magnum Company LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:03 AM

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Chapter 11 - Current Liabilities and Payroll 100. The entry to record the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,500 b. debit to FICA Taxes Payable for $1,800 c. credit to Payroll Tax Expense for $248 d. debit to Payroll Tax Expense for $1,148 ANSWER: RATIONALE:

d Payroll Tax Expense = FICA Taxes Withheld + Federal Unemployment Taxes + State Unemployment Taxes = $900 + $32 + $216 = $1,148 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,148. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Magnum Company LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:04 AM

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Chapter 11 - Current Liabilities and Payroll 101. The following totals for the month of April were taken from the payroll register of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Unemployment taxes

$10,000 750 2,000 450 420

The entry to record the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $1,170 b. debit to FICA Taxes Payable for $1,500 c. credit to Payroll Tax Expense for $420 d. debit to Payroll Tax Expense for $1,620 ANSWER: RATIONALE:

a Payroll Tax Expense = FICA Taxes Withheld + Unemployment Taxes = $750 + $420 = $1,170 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,170. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:28 AM

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Chapter 11 - Current Liabilities and Payroll 102. An employee receives an hourly wage rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $110; cumulative earnings for the year prior to this week, $24,500; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $569.88 b. $539.00 c. $625.00 d. $544.88 ANSWER: RATIONALE:

a Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate = ($15 × 40) + ($15 × 1.5 × 6) = $735 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $735 – [$110 + ($735 × 6.0%) + ($735 × 1.5%)] = $569.88 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:29 AM

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Chapter 11 - Current Liabilities and Payroll 103. The following totals for the month of June were taken from the payroll register of Young Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%

$15,000 1,125 3,000 500 4,000

The entry to record the accrual of the employer’s payroll taxes would include a debit to a. Payroll Tax Expense for $2,498 b. Social Security and Medicare Tax Payable for $2,250 c. Payroll Tax Expense for $1,373 d. Payroll Tax Expense for $3,000 ANSWER: RATIONALE:

c Payroll Tax Expense = Social Security and Medicare Taxes Withheld + Federal and State Unemployment Taxes = $1,125 + ($4,000 × 6.2%) = $1,125 + $248 = $1,373 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,373. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:07 PM DATE MODIFIED: 2/24/2017 9:31 AM

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Chapter 11 - Current Liabilities and Payroll Use this information for Harris Company to answer the following questions. Assuming no employees are subject to ceilings for their earnings, Harris Company has the following information for the pay period of January 15–31. Gross payroll Social security rate Medicare rate

$10,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$1,800 0.8% 5.4%

104. Salaries Payable would be recorded for a. $8,200 b. $6,830 c. $8,630 d. $7,450 ANSWER: RATIONALE:

d Salaries Payable = Gross Payroll – (Federal Income Tax Withheld + Social Security Tax + Medicare Tax) = $10,000 – [$1,800 + ($10,000 × 6.0%) + ($10,000 × 1.5%)] = $7,450 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harris Company LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:32 AM

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Chapter 11 - Current Liabilities and Payroll 105. Assuming that all wages are subject to federal and state unemployment taxes, the employer's payroll tax expense would be a. $1,370 b. $750 c. $620 d. $2,870 ANSWER: RATIONALE:

a Employer's Payroll Tax Expense = Social Security Tax + Medicare Tax + Federal Unemployment Tax + Sate Unemployment Tax = ($10,000 × 6.0%) + ($10,000 × 1.5%) + ($10,000 × 0.8%) + ($10,000 × 5.4%) = $600 + $150 + 80 + $540 = $1,370 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harris Company LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:33 AM

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Chapter 11 - Current Liabilities and Payroll 106. Assume that social security taxes are payable at a 6.0% rate, Medicare taxes are payable at a 1.5% rate with no maximum earnings, and federal and state unemployment compensation taxes total 4.6% on the first $7,000 of earnings. If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total payroll tax related to the current week? a. $187.50 b. $196.70 c. $344.50 d. $9.20 ANSWER: RATIONALE:

b Employer's Payroll Tax Expense = Social Security Tax + Medicare Tax + Federal and State Unemployment Tax = ($2,500 × 6.0%) + ($2,500 × 1.5%) + [($7,000 – $6,800) × 4.6%] = $150 + $37.50 + $9.20 = $196.70 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:34 AM

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Chapter 11 - Current Liabilities and Payroll 107. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record the accrued payroll taxes would include a a. debit to SUTA Payable for $630 b. debit to SUTA Payable for $18,900 c. credit to SUTA Payable for $630 d. credit to SUTA Payable for $18,900 ANSWER: RATIONALE:

c SUTA Payable = $15,000 × 4.2% = $630 The journal entry to record the accrued payroll taxes would include a credit to SUTA Payable of $630. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:35 AM 108. Which of the following is an example of a variable component of a payroll system? a. hours worked b. Medicare tax rate c. rate of pay d. social security number ANSWER: POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 109. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record accrued salaries would include a a. debit to Salaries Payable of $450,000 b. credit to Salaries Payable of $500,000 c. debit to Salaries Expense of $500,000 d. credit to Salaries Expense of $450,000 ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:36 AM

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Chapter 11 - Current Liabilities and Payroll 110. According to a summary of the payroll of Scotland Company, $500,000 was subject to the 6.0% social security tax and to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record the accrued salaries would include a a. debit to Salaries Payable for $313,000 b. credit to Salaries Payable for $364,500 c. debit to Salaries Expense for $364,500 d. credit to Salaries Expense for $313,000 ANSWER: RATIONALE:

b Salaries Payable = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $500,000 – [$98,000 + ($500,000 × 6.0%) + ($500,000 × 1.5%)] = $364,500 The journal entry to record the accrued salaries would include a credit to Salaries Payable of $364,500. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:37 AM

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Chapter 11 - Current Liabilities and Payroll 111. An aid in internal control over payrolls that indicates employee attendance is the a. time card b. voucher system c. payroll register d. employee's earnings record ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:38 AM 112. A pension plan that requires the employer to make annual pension contributions, with no promise to employees regarding future pension payments, is termed a. funded b. unfunded c. defined benefit d. defined contribution ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:38 AM

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Chapter 11 - Current Liabilities and Payroll 113. During its first year of operations, a company granted its employees vacation privileges and pension rights estimated at a cost of $21,500 and $15,000, respectively. The vacations are expected to be taken in the next year, and the pension rights are expected to be paid in the future 5–30 years. What is the total cost of vacation pay and pension rights to be recognized in the first year? a. $15,000 b. $36,500 c. $6,500 d. $21,500 ANSWER: RATIONALE:

b Total Cost of Vacation Pay and Pension Rights to Be Recognized = Vacation Pay + Pension Expense = $21,500 + $15,000 = $36,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:39 AM 114. A pension plan that promises employees a fixed annual pension benefit, based on years of service and compensation, is called a(n) a. defined contribution plan b. defined benefit plan c. unfunded plan d. compensation plan ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:40 AM

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Chapter 11 - Current Liabilities and Payroll 115. Vacation pay payable is reported on the balance sheet as a(n) a. current liability or long-term liability, depending on when the vacations will be taken by employees b. current liability c. expense d. long-term liability ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:41 AM 116. An unfunded pension liability is reported on the balance sheet as a. a current liability b. owner's equity c. a long-term liability d. a current liability or long-term liability, depending on when the pension liability is to be paid ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:42 AM

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Chapter 11 - Current Liabilities and Payroll 117. The journal entry a company uses to record accrued vacation privileges for its employees at the end of the year is a. debit Vacation Pay Expense; credit Vacation Pay Payable b. debit Vacation Pay Payable; credit Vacation Pay Expense c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:42 AM 118. The journal entry a company uses to record fully funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:43 AM

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Chapter 11 - Current Liabilities and Payroll 119. The journal entry a company uses to record partially funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:43 AM 120. The journal entry a company uses to record pension rights that have not been funded for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:44 AM

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Chapter 11 - Current Liabilities and Payroll 121. Zennia Company provides its employees with varying amounts of vacation per year, depending on their length of employment. The estimated amount of the current year’s vacation cost is $135,000. On December 31, the end of the current year, the current month’s accrued vacation pay is a. $135,000 b. $67,500 c. $0 d. $11,250 ANSWER: RATIONALE:

d Current Month's Accrued Vacation Pay = Current Year's Vacation Pay ÷ 12 months Current Month's Accrued Vacation Pay = $135,000 ÷ 12 = $11,250 POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:45 AM

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Chapter 11 - Current Liabilities and Payroll 122. Hall Company sells merchandise with a one-year warranty. In the current year, sales consist of 4,500 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Hall should show warranty expense of a. $45,000 b. $13,500 c. $31,500 d. $0 ANSWER: RATIONALE:

a Warranty Expense = Sales Units × Average Warranty Repairs = 4,500 units × $10 = $45,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:46 AM 123. Excom sells radios, and each unit carries a two-year replacement warranty. The cost of repair defects under the warranty is estimated at 5% of the sales price. During September, Excom sells 100 radios for $50 each. One radio is actually replaced during September. For what amount in September would Excom debit Product Warranty Expense? a. $50 b. $250 c. $30 d. $120 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Product Warranty Expense = 5% × Sales = 5% × $5,000 = $250 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll 124. Wright Company sells merchandise with a one-year warranty. In the current year, sales consisted of 2,000 units. It is estimated that warranty repairs will average $15 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Wright should show warranty expense of a. $9,000 b. $21,000 c. $30,000 d. $0 ANSWER: RATIONALE:

c Warranty Expense = Sales Units × Average Warranty Repair Cost per Unit Sold = 2,000 units × $15 = $30,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:47 AM

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Chapter 11 - Current Liabilities and Payroll 125. Scott Company sells merchandise with a one-year warranty. Sales consisted of 2,500 units in Year 1 and 2,000 units in Year 2. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2 for the Year 1 sales. Similarly, 30% of repairs will be made in Year 2 and 70% in Year 3 for the Year 2 sales. In the Year 3 income statement, how much of the warranty expense shown will be due to Year 1 sales? a. $6,000 b. $14,000 c. $20,000 d. $0 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:48 AM 126. The cost of a product warranty should be included as an expense in the a. period the cash is collected for a product sold on account b. future period when the cost of repairing the product is paid c. period of the sale of the product d. future period when the product is repaired or replaced ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:49 AM

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Chapter 11 - Current Liabilities and Payroll 127. McKay Company sells merchandise with a one-year warranty. In Year 1, sales consisted of 1,200 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in Year 1 and 70% in Year 2. In the Year 1 income statement, McKay should show warranty expense of a. $3,600 b. $8,400 c. $12,000 d. $0 ANSWER: RATIONALE:

c The warranty expense is recorded in the same period in which the sale is recorded. Warranty Expense in the Year 1 Income Statement = Sales Units × Average Warranty Repair Cost per Unit = 1,200 units × $10 = $12,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:49 AM

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Chapter 11 - Current Liabilities and Payroll 128. Blast sells portable CD players, and each unit carries a one-year replacement warranty. The cost of repair defects under the warranty is estimated at 10% of the sales price. During May, Blast sells 650 portable CD players for $50 each. For what amount in May would Blast debit Product Warranty Expense? a. $3,250 b. $1,625 c. $650 d. $1,300 ANSWER: RATIONALE:

a Product Warranty Expense = 10% × (Number of CD Players × Sale Price per CD Player) = 10% × (650 × $50) = $3,250 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:51 AM 129. Estimating and recording product warranty expense in the period of the sale best follows the a. cost concept b. business entity concept c. matching concept d. materiality concept ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:51 AM

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Chapter 11 - Current Liabilities and Payroll 130. The journal entry a company uses to record the estimated product warranty liability expense is a. debit Product Warranty Expense; credit Product Warranty Payable b. debit Product Warranty Payable; credit Cash c. debit Product Warranty Expense; credit Cash d. debit Product Warranty Payable; credit Product Warranty Expense ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:52 AM 131. Which of the following is the most desirable quick ratio? a. 2.20 b. 1.80 c. 1.95 d. 1.50 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:53 AM

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Chapter 11 - Current Liabilities and Payroll 132. Crafter Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment

$28,000 15,000 20,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$10,000 2,000 25,000

Determine the quick ratio (rounded to one decimal point). a. 5.3 b. 3.6 c. 3.3 d. 2.3 ANSWER: RATIONALE:

b Quick Ratio = Quick Assets/Current Liabilities = (Cash + Accounts Receivable)/(Current Portion of Long-Term Debt + Accounts Payable) = ($28,000 + $15,000)/($10,000 + $2,000) = $43,000/$12,000 = 3.6 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:54 AM

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Chapter 11 - Current Liabilities and Payroll 133. Based on the following data, what is the quick ratio (rounded to one decimal point)? Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Fixed assets Prepaid expenses

$ 30,000 60,000 5,000 30,000 50,000 69,000 80,000 100,000 30,000 670,000 1,000

a. 3.4 b. 3.0 c. 2.2 d. 1.8 ANSWER: RATIONALE:

a Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities) = ($60,000 + $30,000 + $30,000)/($30,000 + $5,000) = $120,000/$35,000 = 3.4 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:55 AM

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Chapter 11 - Current Liabilities and Payroll 134. Quick assets include a. cash, cash equivalents, receivables, prepaid expenses, and inventory b. cash, cash equivalents, receivables, and prepaid expenses c. cash, cash equivalents, receivables, and inventory d. cash, cash equivalents, and receivables ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:56 AM

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Chapter 11 - Current Liabilities and Payroll 135. Young Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment

$35,000 15,000 30,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$10,000 2,000 25,000

Determine the quick ratio (rounded to one decimal point). a. 6.7 b. 13.0 c. 4.2 d. 3.5 ANSWER: RATIONALE:

c Quick Ratio = Quick Assets/Current Liabilities = (Cash + Accounts Receivable)/(Current Portion of Long-Term Debt + Accounts Payable) = ($35,000 + $15,000)/($10,000 + $2,000) = $50,000/$12,000 = 4.2 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:07 AM

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Chapter 11 - Current Liabilities and Payroll 136. Which of the following is the most desirable quick ratio? a. 1.20 b. 1.00 c. 0.95 d. 0.50 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:58 AM

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Chapter 11 - Current Liabilities and Payroll Matching Match each payroll item that follows to the one item (a–f) that best describes its characteristics. a. Amount is limited, withheld from employee only b. Amount is limited, withheld from employee and matched by employer c. Amount is limited, paid by employer only d. Amount is not limited, withheld from employee only e. Amount is not limited, withheld from employee and matched by employer f. Amount is not limited, paid by employer only DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 9:59 AM 137. Federal income tax ANSWER: d POINTS: 1 138. FICA—Social security ANSWER: b POINTS: 1 139. FICA—Medicare ANSWER: e POINTS: 1 140. Federal unemployment compensation tax (FUTA) ANSWER: c POINTS: 1 141. State unemployment compensation tax (SUTA) ANSWER: c POINTS: 1

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Chapter 11 - Current Liabilities and Payroll Use the following key (a–d) to identify the proper treatment of each contingent liability. a. Record only b. Record and disclose c. Disclose only d. Do not record or disclose DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:01 AM 142. Event is reasonably possible and amount is estimable ANSWER: c POINTS: 1 143. Event is reasonably possible but amount is not estimable ANSWER: c POINTS: 1 144. Event is probable and amount is estimable ANSWER: b POINTS: 1 145. Event is probable but amount is not estimable ANSWER: c POINTS: 1 146. Event is remote and amount is estimable ANSWER: d POINTS: 1 147. Event is remote and amount is not estimable ANSWER: d POINTS: 1 Match each of the following items with the term or phrase (a–g) that best describes it. Terms or phrases may be used more than once. a. Current ratio b. Working capital c. Quick assets Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll d. Quick ratio e. Record an accrual and disclose in the notes to the financial statements f. Disclose only in notes to financial statements g. No disclosure needed in notes to financial statements DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:15 AM 148. Current assets/Current liabilities ANSWER: a POINTS: 1 149. Remote contingent liability ANSWER: g POINTS: 1 150. Current assets – Current liabilities ANSWER: b POINTS: 1 151. Cash + Temporary investments + Accounts receivable ANSWER: c POINTS: 1 152. (Cash + Temporary investments + Accounts receivable)/Current liabilities ANSWER: d POINTS: 1 153. Probable likelihood and estimable liability ANSWER: e POINTS: 1 154. Probable likelihood of a liability but cannot be estimated ANSWER: f POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll 155. Reasonably possible likelihood of a liability ANSWER: f POINTS: 1 156. Measures the “instant” debt-paying ability of a company ANSWER: d POINTS: 1 Subjective Short Answer 157. A business issued a 120-day, 6% note for $10,000 to a creditor on account. The company uses a 360-day year for interest calculations. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest. Journal Description Debit Credit (a)

(b)

Journal

ANSWER: Description (a) Accounts Payable Notes Payable

(b) Notes Payable Interest Expense Cash *$10,000 × 6% × 120/360 = $200

Debit 10,000

Credit 10,000

10,000 200* 10,200

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:10 AM

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Chapter 11 - Current Liabilities and Payroll 158. On August 1, Batson Company issued a 60-day note with a face amount of $140,000 to Jergens Company for merchandise inventory. (Assume a 360-day year is used for interest calculations.) a. Determine the proceeds of the note assuming the note carries an interest rate of 6%. b. Determine the proceeds of the note assuming the note is discounted at 6%. a. $140,000 b. $138,600 $140,000 – ($140,000 × 6% × 60/360) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:21 AM ANSWER:

159. Journalize the following, assuming a 360-day year is used for interest calculations: Apr. 30 May 30

Issued a $150,000, 30-day, 6% note dated April 30 to Misner Co. on account. Paid Misner Co. the amount owed on the note dated April 30.

ANSWER:

Apr. 30

May 30

Accounts Payable—Misner Co. Notes Payable—Misner Co.

150,000

Notes Payable—Misner Co. Interest Expense Cash

150,000 750

150,000

150,750

POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 160. Roseland Design borrowed $700,000 on a 90-day note from CorpOne Funding Company. CorpOne discounts the note at 8%. (Assume a 360-day year is used for interest calculations.) (a) Journalize Roseland’s entries to record: a. The issuance of the note. b. The payment of the note at maturity. (b) Journalize CorpOne’s entries to record: a. The receipt of the note. b. The receipt of the payment of the note at maturity. ANSWER:

(a) a. Cash Interest Expense Notes Payable b. Notes Payable Cash (b) a. Notes Receivable Cash Interest Revenue b. Cash

686,000 14,000* 700,000 700,000 700,000 700,000 686,000 14,000* 700,000

Notes Receivable

700,000

*$700,000 × 8% × 90/360

POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 161. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day year is used for interest calculations.) June

30 Aug. 29

James Co. purchased merchandise on account from O’Leary Co., $90,000, terms n/30. The cost of merchandise sold was $54,000. James Co. issued a 60-day, 5% note for $90,000 on account. James Co. paid the amount due.

ANSWER: James Co. (Borrower) June 1 Merchandise Inventory Accounts Payable 30 Accounts Payable Notes Payable Aug. 29 Notes Payable Interest Expense Cash O’Leary Co. (Creditor) June 1 Accounts Receivable Sales

90,000 90,000 90,000 90,000 90,000 750 90,750

90,000 90,000

1 Cost of Merchandise Sold Merchandise Inventory

54,000

30 Notes Receivable Accounts Receivable

90,000

Aug. 29 Cash Notes Receivable Interest Revenue

54,000

90,000 90,750 90,000 750

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:27 AM 162. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll year is used for interest calculations.) June

1 30

Aug. 29

Regis Co. purchased merchandise on account from Winthrop Co., $60,000, terms n/30. The cost of merchandise sold was $36,000. Regis Co. issued a 60-day, 5% note for $60,000 on account. Regis Co. paid the amount due.

ANSWER:

Regis Co. (Borrower) June 1 Merchandise Inventory Accounts Payable

60,000

30 Accounts Payable Notes Payable

60,000

Aug. 29 Notes Payable Interest Expense Cash

60,000 500

60,000

60,500

Winthrop Co. (Creditor) June 1 Accounts Receivable Sales

60,000 60,000

1 Cost of Merchandise Sold Merchandise Inventory

36,000

30 Notes Receivable Accounts Receivable

60,000

Aug. 29 Cash Notes Receivable Interest Revenue

36,000

60,000 60,500 60,000 500

POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 163. On October 1, Ramos Co. signed a $90,000, 60-day discounted note at the bank. The discount rate was 6%, and the note was paid on November 30. (Assume a 360-day year is used for interest calculations.) (a) (b)

Journalize the entries for October 1 and November 30. Assume that Ramos Co. signed a 6% note. Journalize the entries for October 1 and November 30.

ANSWER:

(a) Oct. 1 Cash Interest Expense Notes Payable

89,100 900

Nov. 30 Notes Payable Cash

90,000

(b) Oct. 1 Cash Notes Payable

90,000

Nov. 30 Notes Payable Interest Expense Cash

90,000 900

90,000

90,900

POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 164. Journalize the following entries on the books of Winston Co. for August 1, September 1, and November 30. (Assume a 360-day year is used for interest calculations.) Aug. 1 Sept. 1 Nov. 30 ANSWER:

Winston Co. purchased merchandise for $75,000 on account from Bagley Co., terms n/30. Winston Co. issued a 90-day, 6% note for $75,000 on account. Winston Co. paid the amount due. Aug. 1 Merchandise Inventory Accounts Payable

75,000

Sept. 1Accounts Payable Notes Payable

75,000

Nov. 30 Notes Payable 75,000 Interest Expense 1,125 Cash POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:29 AM

75,000

76,125

Page 92

Chapter 11 - Current Liabilities and Payroll 165. A borrower has two alternatives for a loan: (1) issue a $480,000, 60-day, 8% note or (2) issue a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for interest calculations.) (a) (b)

Calculate the amount of the interest expense for each option. Determine the proceeds received by the borrower in each situation.

ANSWER:

(a) (b)

$480,000 × 8% × 60/360 = $6,400 for each alternative. (1) $480,000 simple interest note: $480,000 proceeds (2) $480,000 discounted note: $480,000 – $6,400 interest = $473,600 proceeds

POINTS: DIFFICULTY:

Page 93

Chapter 11 - Current Liabilities and Payroll 166. Baker Green’s weekly gross earnings for the week ending December 7 were $2,500, and her federal income tax withholding was $525. Prior to this week Green had earned $98,000 for the year. Assuming the social security rate is 6.0% and Medicare is 1.5%, what is Green’s net pay? ANSWER:

Total wage payment Less: Federal income tax withholding Earnings subject to social security tax: Lesser of ($120,000 – $98,000) or $2,500 Social security tax rate Social security tax Medicare tax ($2,500 × 1.5%) Net pay

$2,500.00 (525.00) $2,500 × 6.0% (150.00) (37.50) $1,787.50

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/27/2017 9:39 AM

Page 94

Chapter 11 - Current Liabilities and Payroll 167. John Woods’ weekly gross earnings for the present week were $2,500. Woods has two exemptions. Using an $80 value for each exemption and the tax rate schedule below, what is Woods’ federal income tax withholding? Single person (including head of household) If amount of wages (after subtracting withholding The amount of income tax allowance) is: withholding is: Not over $43

Over – $43 $222 $767 $1,796 $3,700 $7,992 $8,025

But not over – –$222.......$0.00 plus 10% –$767.......$17.90 plus 15% –$1,796....$99.65 plus 25% –$3,700....$356.90 plus 28% –$7,992....$890.02 plus 33% –$8,025....$2,306.38 plus 35% .................$2,317.93 plus 39.6%

ANSWER:

of excess over – –$43 –$222 –$767 –$1,796 –$3,700 –$7,992 –$8,025

Total wage payment Allowance per exemption Multiplied by allowances claimed on Form W-4 Amount subject to withholding Base withholding from wage bracket above Plus additional withholding: 28% of excess over $1,796 Federal income tax withholding

$2,500 $80 × 2

160 $2,340 $356.90 152.32 $509.22

POINTS: DIFFICULTY:

Page 95

Chapter 11 - Current Liabilities and Payroll 168. An employee earns $40 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 60 hours during the week and that the gross pay prior to the current week totaled $58,000. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and the federal income tax to be withheld was $614. (a) Determine the gross pay for the week. (b) Determine the net pay for the week.

ANSWER:

(a) Regular pay (40 hrs. × $40) Overtime pay (20 hrs. × $60) Gross pay (b) Gross pay Less:

$1,600.00 1,200.00 $2,800.00 $2,800.00 Social security tax (6.0% × $2,800) $168.00 Medicare tax (1.5% × $2,800) 42.00 Federal withholding 614.00

Net pay

824.00 $1,976.00

POINTS: DIFFICULTY:

Page 96

Chapter 11 - Current Liabilities and Payroll 169. Dixon Sales has seven sales employees that receive weekly paychecks. Each earns $10.25 per hour and each has worked 40 hours in the pay period. Each employee pays 12% of gross in federal income tax, 3% in state income tax, 6.0% of gross in social security tax, 1.5% of gross in Medicare tax, and 0.5% in state disability insurance. Journalize the recognition of the pay period ending January 19 that will be paid to the employees January 26. ANSWER: Jan. 19

Sales Wages Expense

7 employees × 40 hours × $10.25

2,870.00

Federal Income Tax Payable

344.40 $2,870.00 × 12%

State Income Tax Payable

86.10 $2,870.00 × 3%

Social Security Tax Payable

172.20 $2,870.00 × 6.0%

Medicare Tax Payable

43.05 $2,870.00 × 1.5%

State Disability Insurance Sales Wages Payable

14.35 $2,870.00 × 0.5% Wages Expense – Deductions 2,209.90

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:54 AM

Page 97

Chapter 11 - Current Liabilities and Payroll 170. Mobile Sales has five sales employees that receive weekly paychecks. Each earns $11.50 per hour and each has worked 40 hours in the pay period. Each employee pays 12% of gross in federal income tax, 3% in state income tax, 6.0% of gross in social security tax, 1.5% of gross in Medicare tax, and 0.5% in state disability insurance. Journalize the pay period ending January 19 that will be paid to the employees January 26. ANSWER: Jan. 19

Sales Wages Expense

2,300.00

Federal Income Tax Payable State Income Tax Payable

5 employees × 40 hours × $11.50

276.00 $2,300.00 × 12% 69.00 $2,300.00 × 3%

Social Security Tax Payable

138.00 $2,300.00 × 6.0%

Medicare Tax Payable

34.50 $2,300.00 × 1.5%

State Disability Insurance

11.50 $2,300.00 × 0.5%

Sales Wages Payable

1,771.00

Wages Expense – Deductions

POINTS: DIFFICULTY:

Page 98

Chapter 11 - Current Liabilities and Payroll 171. The following information is for employee Ella Dodd for the week ended March 15. Total hours worked: 48 Rate: $15 per hour, with double time for all hours in excess of 40 Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social security: 6.0% on maximum earnings of $120,000 Medicare tax: 1.5% on all earnings State unemployment: 3.4% on maximum earnings of $7,000; on employer Federal unemployment: 0.8% on maximum earnings of $7,000; on employer (a) (b)

Determine (1) total earnings, (2) total deductions, and (3) cash paid. Determine each of the employer's payroll taxes related to the earnings of Ella Dodd for the week ended March 15.

ANSWER:

(a) (1) 40 hours at $15 $600.00 8 hours at $30 240.00 (2) Deductions: Income tax $200.00 United Fund deduction 50.00 Social security tax, 6.0% of $840 50.40 Medicare tax, 1.5% of $840 12.60 Total deductions (3) Cash paid (b) Social security and Medicare taxes, 7.5% × $840 State unemployment tax, 3.4% × $600 Federal unemployment tax, 0.8% × $600 Total

$840.00

313.00 $527.00 $63.00 20.40 4.80 $88.20

POINTS: DIFFICULTY:

Page 99

Chapter 11 - Current Liabilities and Payroll 172. The summary of the payroll for the monthly pay period ending July 15 indicated the following: Sales salaries Federal income tax withheld Office salaries Medical insurance withheld Social security tax withheld Medicare tax withheld

$125,000 32,300 35,000 7,370 10,200 2,550

Journalize the entries to record (a) the payroll and (b) the employer's payroll tax expense for the month. The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8%. Only $25,000 of salaries are subject to unemployment taxes. ANSWER:

(a) Sales Salaries Expense 125,000 Office Salaries Expense 35,000 Social Security Tax Payable Medicare Tax Payable Federal Income Tax Payable Medical Insurance Payable Salaries Payable (b) Payroll Taxes Expense 13,725 Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 10:59 AM

10,200 2,550 32,300 7,370 107,580

10,200 2,550 775 200

173. Excel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31, indicated the following: Salaries expense Federal income tax withheld

$120,000 20,000

For the year ended December 31, $40,000 of the December 31 payroll is subject to social security tax of 6.0%; $120,000 is subject to Medicare tax of 1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal Copyright Cengage Learning. Powered by Cognero.

Page 100

Chapter 11 - Current Liabilities and Payroll unemployment tax of 0.8%. As of January 1, of the following year, all of the $120,000 is subject to all payroll taxes. Prepare the journal entries for payroll tax expense if the employees are paid (a) December 31 of the current year or (b) January 2 of the following year. ANSWER:

(a) Social security tax, 6.0% × $40,000 Medicare tax, 1.5% × $120,000 State unemployment, 4.3% × $10,000 Federal unemployment, 0.8% × $10,000 Total payroll tax expense

$2,400 1,800 430 80 $4,710

Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable (b) Social security tax, 6.0% × $120,000 Medicare tax, 1.5% × $120,000 State unemployment tax, 4.3% × $120,000 Federal unemployment tax, 0.8% × $120,000 Total payroll tax expense Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

4,710 2,400 1,800 430 80 $7,200 1,800 5,160 960 $15,120 15,120 7,200 1,800 5,160 960

POINTS: DIFFICULTY:

Page 101

Chapter 11 - Current Liabilities and Payroll 174. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $120; cumulative earnings for the year prior to this week, $5,500; social security tax rate, 6.0%; and Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Prepare the journal entries to record the salaries expense and the employer payroll tax expense. ANSWER: Salaries Expense [($15 × 40) + ($22.50 × 6)] Social Security Taxes Payable ($735 × 6.0%) Medicare Taxes Payable ($735 × 1.5%) Federal Withholding Taxes Payable Salaries Payable

735.00

Payroll Tax Expense Social Security Taxes Payable ($735 × 6.0%) Medicare Taxes Payable ($735 × 1.5%) State Unemployment Comp. Taxes Payable ($735 × 3.4%) Fed. Unemployment Comp. Taxes Payable ($735 × 0.8%)

44.10 11.03 120.00 559.87

86.00 44.10 11.03 24.99 5.88

POINTS: DIFFICULTY:

Page 102

Chapter 11 - Current Liabilities and Payroll 175. Townson Company had gross wages of $200,000 during the week ended December 10. The amount of wages subject to social security tax was $180,000, while the amount of wages subject to federal and state unemployment taxes was $24,000. Tax rates are as follows: Social security 6.0% Medicare 1.5 State unemployment 5.3 Federal unemployment 0.8 The total amount withheld from employee wages for federal income taxes was $32,000. (a) (b)

Journalize the entry to record the payroll for the week of December 10. Journalize the entry to record the payroll tax expense incurred for the week of December 10.

ANSWER:

(a) Wages Expense

200,000

Social Security Tax Payable ($180,000 × 6.0%)

10,800

Medicare Tax Payable ($200,000 × 1.5%)

3,000

Employees Federal Income Tax Payable

32,000

Wages Payable

154,200

(b) Payroll Tax Expense

15,264

Social Security Tax Payable

10,800

Medicare Tax Payable

3,000

State Unemployment Tax Payable ($24,000 × 5.3%)

1,272

Federal Unemployment Tax Payable ($24,000 × 0.8%)

192

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:01 AM

Page 103

Chapter 11 - Current Liabilities and Payroll 176. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. (a) (b)

Journalize the entry to record the accrual of payroll. Journalize the entry to record the accrual of payroll taxes.

ANSWER:

(a) Salaries Expense

500,000

Social Security Tax Payable (6.0% × $450,000)

27,000

Medicare Tax Payable (1.5% × $500,000)

7,500

Employees Federal Income Tax Payable

98,000

Salaries Payable

367,500

(b) Payroll Tax Expense

35,250

Social Security Tax Payable

27,000

Medicare Tax Payable

7,500

State Unemployment Tax Payable

630

Federal Unemployment Tax Payable

120

POINTS: DIFFICULTY:

Page 104

Chapter 11 - Current Liabilities and Payroll 177. The payroll register of Seaside Architecture Company indicates $970 of social security and $257 of Medicare tax withheld on total salaries of $16,500 for the period. Federal withholding for the period totaled $4,235. Prepare the journal entry for the period’s payroll. ANSWER:

Salaries Expense Social Security Tax Payable Medicare Tax Payable Federal Withholding Tax Payable Salaries Payable

16,500 970 257 4,235 11,038

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:03 AM 178. The payroll register of Seaside Architecture Company indicates $870 of social security and $217 of Medicare tax withheld on total salaries of $14,500 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250 at the federal rate of 0.8% and state rate of 5.4%. Prepare the journal entry to record the payroll tax expense for the period. Payroll Tax Expense 1,412.50 Social Security Tax Payable 870.00 Medicare Tax Payable 217.00 State Unemployment Tax Payable 283.50* Federal Unemployment Tax Payable 42.00** *$5,250 × 5.4% **$5,250 × 0.8% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:04 AM ANSWER:

Page 105

Chapter 11 - Current Liabilities and Payroll 179. List five internal controls that relate directly to payroll. ANSWER:

All of the cash payment controls. Proper written authorization of additions and deletions of employees. Proper written authorization of payroll rate changes. Control of employee attendance records. Verification that employees are correctly recording their time and attendance. Blank payroll checks controlled and accounted for. Controlled access to check-signing machine. Separate payroll bank account. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:05 AM

Page 106

Chapter 11 - Current Liabilities and Payroll 180. The payroll summary for December 31 for Waters Co. revealed total earnings of $80,000. Earnings subject to 6.0% social security tax were $60,000; earnings subject to 1.5% Medicare tax were $80,000; and earnings of $3,000 were subject to 4.3% state and 0.8% federal unemployment compensation tax. Journalize the entry to record the accrual of payroll taxes. ANSWER:

Payroll Tax Expense

4,953

Social Security Tax Payable ($60,000 × 6.0%)

3,600

Medicare Tax Payable ($80,000 × 1.5%)

1,200

State Unemployment Tax Payable ($3,000 × 4.3%)

129

Federal Unemployment Tax Payable ($3,000 × 0.8%)

POINTS: DIFFICULTY:

Page 107

Chapter 11 - Current Liabilities and Payroll 181. Perez Company has the following information for the pay period of January 15–31: Gross payroll Social security rate Medicare rate

$20,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$2,500 0.8% 5.4%

Assuming no employees are subject to ceilings for their earnings, calculate salaries payable and payroll tax expense. ANSWER:

Salaries payable: Gross payroll Less: Social security ($20,000 × 6.0%) Medicare ($20,000 × 1.5%) Federal income tax withheld

$20,000 $1,200 300 2,500

4,000 $16,000

Payroll tax expense: Social security ($20,000 × 6.0%) $1,200 Medicare ($20,000 × 1.5%) 300 Federal unemployment ($20,000 × 0.8%) 160 State unemployment ($20,000 × 5.4%) 1,080 $2,740 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/27/2017 9:40 AM

Page 108

Chapter 11 - Current Liabilities and Payroll 182. An employee receives an hourly rate of $45, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $950; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Calculate the employer's payroll tax expense if: (a) This is the first payroll of the year and the employee has no cumulative earnings for the year to date. (b) The employee’s cumulative earnings for the year prior to this week equal $6,200. (c) The employee’s cumulative earnings for the year prior to this week equal $118,700. ANSWER:

Employee wages = (40 × $45) + (8 × $67.50) = $2,340

(a)

Social security: $2,340 × 6.0% Medicare: $2,340 × 1.5% State unemployment: $2,340 × 3.4% Federal unemployment: $2,340 × 0.8% Total

$140.40 35.10 79.56 18.72 $273.78

(b)

Social security: $2,340 × 6.0% Medicare: $2,340 × 1.5% State unemployment: $800 × 3.4% Federal unemployment: $800 × 0.8% Total

$140.40 35.10 27.20 6.40 $209.10

(c)

Social security: $1,300 × 6.0%

$ 78.00

Medicare: $2,340 × 1.5% Total

35.10 $113.10

POINTS: DIFFICULTY:

Page 109

Chapter 11 - Current Liabilities and Payroll 183. The following totals for the month of February were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%

$13,000 975 2,600 500 4,000

(a) How much is the total payroll tax expense for Arcon Company for this payroll? (b) Assume that the monthly salaries expense remains the same for the entire year and no employees are hired or fired during that time. Based on what you learned in Chapter 11 about payroll taxes, do you expect the total payroll tax expense to stay the same every month? Explain. ANSWER:

(a) Total payroll expense: $975 matching social security and Medicare taxes + $248 ($4,000 × 6.2%) unemployment taxes = $1,223

(b) Total payroll tax expense is not expected to stay the same every month. The salaries subject to unemployment taxes should soon be zero, and it is possible that some employees may exceed the limit for social security tax before the year ends, so total payroll tax expense should decrease. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:32 AM

Page 110

Chapter 11 - Current Liabilities and Payroll 184. According to a summary of the payroll of Sinclair Company, $505,000 was subject to the 6.0% social security tax and $545,000 was subject to the 1.5% Medicare tax. Also, $10,000 was subject to state and federal unemployment taxes. (a) (b)

Calculate the employer’s payroll taxes using the following rates: State unemployment, 4.2%; Federal unemployment, 0.8%. Journalize the entry to record the accrual of the employer's payroll taxes.

ANSWER:

(a) Social security tax (6.0% × $505,000) Medicare tax (1.5% × $545,000) State unemployment (4.2% × $10,000) Federal unemployment (0.8% × $10,000)

(b) Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

$30,300 8,175 420 80 $38,975 38,975 30,300 8,175 420 80

POINTS: DIFFICULTY:

Page 111

Chapter 11 - Current Liabilities and Payroll 185. Martin Services Company provides its employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $39,500 for the period. The pension plan requires a contribution to the plan administrator equal to 9% of employee salaries. Salaries were $750,000 during the period. Provide the journal entries for (a) the vacation pay and (b) the pension benefit. ANSWER: (a) Vacation Pay Expense Vacation Pay Payable (b) Pension Expense Cash

39,500 39,500 67,500 67,500

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:34 AM

Page 112

Chapter 11 - Current Liabilities and Payroll 186. Below are two independent sets of transactions for Welcott Company: (a) Welcott provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $78,000. Journalize the adjusting entry required on January 31, the end of the first month of the year, to record the accrued vacation pay. (b) Welcott maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Northern Trust, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is $119,600 for the quarter ended December 31, journalize entries to record (1) the accrued pension liability on December 31 and (2) the payment to the funding agent on January 15. ANSWER: (a)

Vacation Pay Expense Vacation Pay Payable

6,500 6,500

(b) (1) Dec. 31 Pension Expense 119,600 Unfunded Pension Liability (2)

Jan. 15 Unfunded Pension Liability Cash

119,600

119,600 119,600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:23 AM

Page 113

Chapter 11 - Current Liabilities and Payroll 187. Journalize the following transactions for Riley Corporation: Dec. 31 The accrued product warranty expense for the year is estimated to be 2.5% of sales. Sales for the year totaled $8,850,000. 31 The accrued vacation pay for the year is estimated to be $75,000. 31 Paid First Insurance Co. $55,000 as fund trustee for the pension plan. The annual pension cost is $87,000. ANSWER:

Dec. 31 Product Warranty Expense Product Warranty Payable $8,850,000 × 0.025 = $221,250

221,250 221,250

31 Vacation Pay Expense Vacation Pay Payable

75,000

31 Pension Expense Cash Unfunded Pension Liability

87,000

75,000

55,000 32,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:36 AM

Page 114

Chapter 11 - Current Liabilities and Payroll 188. Kelly Howard has the following transactions. Prepare the journal entries. Dec. 31

The accrued product warranty expense for the year is estimated to be 2.3% of sales. Sales for the year totaled $6,005,000.

The accrued vacation pay for the year is estimated to be $75,225.

Paid Reliable Insurance Co. $275,000 as fund trustee for the pension plan. The annual pension cost is $350,000.

ANSWER: Dec. 31 Product Warranty Expense Product Warranty Payable *$6,005,000 × 2.3% = $138,115

138,115

31 Vacation Pay Expense Vacation Pay Payable

75,225

31 Pension Expense Cash Unfunded Pension Liability

350,000

138,115*

75,225

275,000 75,000

POINTS: DIFFICULTY:

Page 115

Chapter 11 - Current Liabilities and Payroll 189. Journalize the following transactions: Dec. 31

The accrued product warranty expense for the year is estimated to be 1.5% of sales. Sales for the year totaled $7,760,000.

The accrued vacation pay for the year is estimated to be $46,000.

Paid Reliable Insurance Co. $85,000 as fund trustee for the pension plan. The annual pension cost is $109,000.

ANSWER:

Dec. 31 Product Warranty Expense Product Warranty Payable

116,400 116,400*

*$7,760,000 × 0.015 = $116,400 31Vacation Pay Expense Vacation Pay Payable

46,000

31Pension Expense Cash Unfunded Pension Liability

109,000

46,000

85,000 24,000

POINTS: DIFFICULTY:

Page 116

Chapter 11 - Current Liabilities and Payroll 190. Nelson Industries warrants its products for one year. The estimated product warranty is 4.3% of sales. Sales were $475,000 for September. In October, a customer received warranty repairs requiring $215 of parts and $65 of labor. (a) (b)

Journalize the adjusting entry required at September 30, the end of the first month of the current year, to record the estimated product warranty expense. Journalize the entry to record the warranty work provided in October.

(a) Product Warranty Expense 20,425 Product Warranty Payable 20,425 To record warranty expense for September, 4.3% × $475,000. (b) Product Warranty Payable Supplies Wages Payable

280 215 65

ANSWER: POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 2/23/2017 3:10 PM DATE MODIFIED: 3/3/2017 9:25 AM

Page 117

Chapter 11 - Current Liabilities and Payroll 191. Ecco Company sold $150,000 of kitchen appliances with six-month warranties during September. The cost to repair defects under the warranty is estimated at 6% of the sales price. On October 15, a customer required a $200 part replacement, plus $85 labor under the warranty. Provide the journal entry for (a) the estimated expense on September 30 and (b) the October 15 warranty work. ANSWER: (a) Product Warranty Expense Product Warranty Payable *$150,000 × 6%

9,000*

(b) Product Warranty Payable 285 Supplies Wages Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:41 AM

9,000

200 85

Page 118

Chapter 11 - Current Liabilities and Payroll 192. Florida Keys Construction installs swimming pools. It calculates that warranty obligations are 3% of sales. For the year just ending, Florida Keys’ sales were $1,450,000. Previous quarterly entries debiting Warranty Expense totaled $28,700. Determine the estimated warranty expense for the year and make the journal entry necessary to bring the account to the needed balance. ANSWER:

Due to sales of $1,450,000, warranty liability is $43,500 ($1,450,000 × 3%). Since $28,700 has already been recognized, $14,800 ($43,500 – $28,700) must still be recognized. Dec. 31

Warranty Expense Warranty Payable

14,800 14,800

POINTS: DIFFICULTY:

The sales were $1,500,000, thus the warranty liability is $75,000 ($1,500,000 × 5%). Since $48,700 has already been recognized, $26,300 ($75,000 – $48,700) must still be recognized. Dec. 31

Warranty Expense Warranty Payable

26,300 26,300

POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 194. Lamar Industries warrants its products for one year. The estimated product warranty expense is 3% of sales. Sales for June were $190,000. In July, a customer received warranty repairs requiring $185 of parts and $50 of labor. (a) (b)

Journalize the adjusting entry required at June 30, the end of the first month of the current year, to record the estimated product warranty expense. Journalize the entry to record the warranty work provided in July.

ANSWER:

(a) Product Warranty Expense Product Warranty Payable To record warranty expense for June, 3% × $190,000.

5,700

(b) Product Warranty Payable 235 Supplies Wages Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:43 AM

5,700

185 50

195. Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Jones’ legal counsel believes the following will happen in relationship to these incidents: (a) (b) (c) (d) (1)

(2)

It is probable that the EPA fine will stand. An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. Other litigation related to the spill is possible, but the damage amounts are uncertain. Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Prepare any note disclosure related to the spill.

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Chapter 11 - Current Liabilities and Payroll ANSWER:

(1) Damage Awards and Fines

570,000

EPA Fines Payable

405,000

Litigation Claims Payable

165,000

Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” (2) The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $405,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $165,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:26 AM 196. Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000. The company contested the fine. In addition, an employee is seeking $975,000 damages related to the spill. Finally, a homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $580,000. Maximilien's legal counsel believes the following will happen in relationship to these incidents: (a) It is probable that the EPA fine will stand. (b) An out-of-court settlement for $650,000 has recently been reached with the employee, with the final papers to be signed next week. (c) Counsel believes that the homeowner’s case is weak and will be decided in favor of Copyright Cengage Learning. Powered by Cognero.

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Chapter 11 - Current Liabilities and Payroll

(d)

Maximilien Company. Other litigation related to the spill is possible, but the damage amounts are uncertain.

(1)

Based on this information, prepare the journal entries for the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.

(2)

Prepare any note disclosure related to the spill.

ANSWER: (1) Damage Awards and Fines EPA Fines Payable Litigation Claims Payable

2,400,000 1,750,000 650,000

Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” (2) The company experienced a radioactive materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $1,750,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $650,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. POINTS: DIFFICULTY:

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Chapter 11 - Current Liabilities and Payroll 197. Hadley Industries warrants its products for one year. The estimated product warranty expense is 4% of sales. Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $205 of parts and $75 of labor. (a) (b)

ANSWER:

(a) Product Warranty Expense Product Warranty Payable To record warranty expense for June, 4% × $210,000.

8,400 8,400

(b) Product Warranty Payable Supplies Wages Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:46 AM

280 205 75

198. The current assets and current liabilities for Kolbie Company and Newton Company are as follows: Kolbie Company (in millions) For the Year Ending December 31

Newton Company (in millions) For the Year Ending December 31

Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets* Total current assets

$ 8,352 6,034 3,029 446 2,195 $20,056

$ 8,546 752 5,152 660 2,829 $17,939

Current liabilities: Accounts payable Accrued and other current liabilities Total current liabilities

$4,970 3,329 $8,299

$10,430 6,361 $16,791

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Chapter 11 - Current Liabilities and Payroll *These represent prepaid expenses and other non-quick current assets. (a) Determine the quick ratio for both companies. Round to two decimal places. (b) Interpret the quick ratio difference between the two companies.

ANSWER:

(a) Quick Ratio = Quick Assets/Current Liabilities Kolbie Company: Quick Ratio = ($8,352 + $6,034 + $3,029)/$8,299 = 2.10 Newton Company: Quick Ratio = ($8,546 + $752 + $5,152)/$16,791 = 0.86 (b) It is clear that Kolbie’s short-term liquidity is stronger than Newton’s. Kolbie’s quick ratio is 144% [(2.10 – 0.86)/0.86] higher. Kolbie has a much stronger relative cash and short-term investment position than does Newton. Kolbie’s cash and shortterm investments are over 72% of total current assets (173% of current liabilities), compared to Newton’s 52% of total current assets (55% of current liabilities). In addition, Newton’s relative accounts payable position is larger than Kolbie’s, indicating the possibility that Newton has longer supplier payment terms than does Kolbie. A quick ratio of 2.10 for Kolbie suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.86 for Newton indicates an efficient but tight quick asset management policy.

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 2/24/2017 11:47 AM

Page 124

Chapter 11 - Current Liabilities and Payroll 199. Core Company had the following assets and liabilities as of December 31: Assets Cash Accounts receivable Inventory Equipment

$58,000 25,000 20,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$20,000 12,000 25,000

Calculate the current ratio, working capital, and quick ratio.

ANSWER:

Current ratio: ($58,000 + $25,000 + $20,000)/($20,000 + $12,000) = 3.2 Working capital: $103,000 – $32,000 = $71,000

Quick ratio: ($58,000 + $25,000)/($20,000 + $12,000) = 2.6 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:28 AM 200. Use the following information and calculate the quick ratio for Davis Company and for Bender Inc. (a) Calculate the quick ratio for each company. (b) Comment on which one is more able to meet current liabilities.

Account Cash

Davis Company

Bender Inc.

Dr. $ 321

Dr. $ 425

Cr.

Cash equivalents

Current notes receivable

Cr.

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Chapter 11 - Current Liabilities and Payroll Accounts receivable

603

307

Prepaid expenses

Merchandise inventory

714

898

Fixed assets

920

755 $ 415

$ 225

Accounts payable

260

198

Current accrued liabilities

213

149

Mortgage payable

917

824

Capital

952

1,215

Accumulated depreciation—fixed assets

$2,757

Totals

$2,757

$2,611

ANSWER: (a) Davis Company quick ratio: $1,068 ÷ $473 = 2.26 Bender Inc. quick ratio: $873 ÷ $347 = 2.52 (b) Bender Inc. is more liquid.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 1/16/2017 4:08 PM DATE MODIFIED: 3/3/2017 9:29 AM 201. For Company A and Company B: (a) Calculate the quick ratio for each company. (b) Comment on which one is more able to meet current liabilities.

Account Cash Copyright Cengage Learning. Powered by Cognero.

Company A

Company B

Dr. $21

Dr. $25

Cr.

Cr. Page 126

Chapter 11 - Current Liabilities and Payroll Cash equivalents

Trade notes receivable

Accounts receivable

Prepaid expenses

Merchandise inventory

Fixed assets

Accumulated depreciation—fixed assets

$25

Accounts payable

Current accrued liabilities

Mortgage payable

Capital

$81

Total

ANSWER:

$81

$116

(a) Company A quick ratio: $42 ÷ $39 = 1.08 Company B quick ratio: $48 ÷ $27 = 1.78 (b) Company B is more liquid.

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies True / False 1. There are only four legal structures to form and operate a business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/28/2017 5:18 PM 2. In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership, to the extent of the partner's capital balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 3. A partnership is a legal entity separate from its owners. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 4. A partnership is subject to federal income taxes. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 5. A disadvantage of partnerships is the mutual agency of all partners. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 6. A partnership requires only an agreement between two or more persons to organize. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 7. Each partner may withdraw the assets he or she contributed to the partnership at any time. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 8. When compared to a corporation, one of the major disadvantages of the partnership is its limited life. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 9. When compared to a corporation, one of the major advantages of a partnership is its relative ease of formation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 10. An advantage of the partnership form of business is that each partner’s potential loss is limited to that partner’s investment in the partnership. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 11. A limited liability company is a business entity form designed to overcome some of the disadvantages of the partnership form. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 12. For tax purposes, a limited liability company may elect to be treated as a partnership. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 13. The limited liability company may elect to be manager-managed rather than member-managed, which means that only authorized members may legally bind the corporation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 9:52 AM 14. Each partner has a separate capital and withdrawal account. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 15. One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 16. If the partnership agreement does not otherwise state, partnership income is divided in proportion to the individual partner's capital balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 17. The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 18. If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y, respectively, and net income is $30,000, X's share of net income is $20,000. a. True b. False ANSWER:

False

RATIONALE: Annual salary allowance Deduct excess of allowances over income

X $36,000

Y $18,000

Total $54,000

12,000

24,000* $30,000

Net income $24,000 $6,000 *Excess of Allowances over Net Income = $54,000 – $30,000 = $24,000 As there is no specification, income and losses are divided equally between X and Y. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 9

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 19. If the net income of a partnership is less than the total of the allowances provided by the partnership agreement, the difference must be divided among the partners in the income-sharing ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 20. The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 21. Partner A devotes full time and partner B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, Partner A will receive a $20,000 share of a net income of $30,000. a. True b. False ANSWER: RATIONALE:

False If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Amount Received by Partner A = $30,000 × 0.5 = $15,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 22. In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a loss. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 11

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 23. Details of the division of partnership income should normally be disclosed in the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 24. When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/24/2017 12:20 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 12

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 25. A new partner contributes accounts receivable to a partnership, which appears in the ledger of his sole proprietorship at $20,500, and there was an allowance for doubtful accounts of $750. If $600 of the accounts receivable are completely worthless, the partnership Accounts Receivable should be debited for $19,900. a. True b. False ANSWER: RATIONALE:

True Amount Debited to Partnership Accounts Receivable = Accounts Receivable Contributed by Partner – Worthless Accounts Receivable = $20,500 – $600 = $19,900 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic DATE CREATED: 2/24/2017 12:21 PM DATE MODIFIED: 3/3/2017 9:54 AM 26. Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 27. A partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws or dies. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 28. In admitting a new partner who purchases an interest, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 29. When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 30. If a new partner is given a 20% interest in the firm, the new partner will receive a 20% interest in earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 31. When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 32. When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 33. Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800. a. True b. False ANSWER: RATIONALE:

True Total Owners’ Equity after Admitting Minton = Sarno's Capital Balance + Minton's Contribution Total Owners’ Equity after Admitting Minton = $42,000 + $22,000 = $64,000 Minton's Capital = $64,000 × 30% = $19,200 Bonus Paid by Minton = Minton's Contribution – Minton's Capital = $22,000 – $19,200 = $2,800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 34. When a partner withdraws from the partnership, the partnership dissolves. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 35. If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability may be created for the amount owed the withdrawing partner. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 36. When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from their personal assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 37. X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital account in the partnership should be credited for $40,000. a. True b. False ANSWER: RATIONALE:

False Partnership's capital is $70,000. A's one-half of the partnership capital interest = $70,000 × 1/2 = $35,000; A's capital account in the partnership should be credited for $35,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 38. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current values. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 39. If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus should be divided between the capital accounts of the original partners according to their capital balances. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 40. When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 41. Dissolution is the term that solely means to liquidate the partnership. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 42. In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the partners' capital accounts on the basis of their capital balances. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 43. If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's capital account, the resulting balance is called a deficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 44. In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or she is responsible for contributing personal assets sufficient to eliminate the deficit. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 45. The process of winding up the affairs of a partnership is referred to as realization. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 46. The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the incomesharing ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 47. If a partner's capital balance is a debit after it has absorbed its share of the loss on realization, the balance is referred to as a deficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 48. In the liquidating process, any uncollected cash becomes a loss to the partnership and is divided among the remaining partners' capital balances based on their income-sharing ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 49. After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution to the partners is $10,000. a. True b. False ANSWER: RATIONALE:

True Cash Available for Distribution is equal to the sum of the capital account balances. Cash Available for Distribution = ($10,000) + ($5,000) + $25,000 = $10,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 50. The statement of members’ equity is used for equity reporting of a partnership. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 51. The partner capital accounts may change due to capital additions, net income, or withdrawals. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 52. The equity reporting for a limited liability company is similar to that of a partnership, but the changes in capital are shown on a statement of members' equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 53. The chart of accounts for a partnership, with the exception of additional drawing and capital accounts, does not differ from the chart of accounts for a sole proprietorship. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 54. Revenue per employee may be used to measure partnership (LLC) efficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-06 - 12-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Multiple Choice 55. Which of the following is a characteristic of a general partnership? a. The partners have co-ownership of partnership property. b. The partnership is subject to federal income tax. c. The partnership has an unlimited life. d. The partners have limited liability. ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 56. Which of the following is not a characteristic of a general partnership? a. The partnership is created by a contract. b. Mutual agency exists. c. Partners share equally in net income or net losses unless an agreement states differently. d. Dissolution occurs only when all partners agree. ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 57. Which of the following is an advantage of a general partnership when compared to a corporation? a. A partnership is more likely to have a positive net income. b. The partnership is relatively inexpensive to organize. c. Creditors to a partnership cannot attach personal assets of partners. d. The partnership usually hires professional managers. ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 58. Which of the following is a disadvantage of a partnership when compared to a corporation? a. The partnership is more likely to have a net loss. b. The partnership is easier to organize. c. The partnership is less expensive to organize. d. The partnership has limited life. ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 59. An advantage of the partnership form of business organization is a. unlimited liability b. mutual agency c. ease of formation d. limited life ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 60. The characteristic of a partnership that gives the authority to any partner to legally bind the partnership and all other partners to business contracts is called a. unlimited liability b. ease of formation c. mutual agency d. dissolution ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 61. When a limited liability company is formed, a. the partnership activities are limited b. all partners have limited liability c. some of the partners have limited liability d. none of the partners has limited liability ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 62. Which of the following is not one of the four major forms of business entities that are discussed in this chapter? a. sole proprietorship b. corporation c. partnership d. subchapter S corporation ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 63. Which of the following is not a characteristic of a limited liability company? a. unlimited life b. limited legal liability c. taxable d. moderate ability to raise capital ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 64. When a partnership is formed, assets contributed by the partners should be recorded on the partnership books at their a. book values on the partners' books prior to their being contributed to the partnership b. fair market value at the time of the contribution c. original costs to the partner contributing them d. assessed values for property tax purposes ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 65. As part of the initial investment, Ray Blake contributes equipment that had originally cost $125,000 and on which accumulated depreciation of $100,000 has been recorded. If similar equipment would cost $150,000 to replace and the partners agree on a valuation of $29,000 for the contributed equipment, what amount should be debited to the equipment account? a. $29,000 b. $150,000 c. $125,000 d. $100,000 ANSWER: RATIONALE:

a The amount to be debited to the equipment account should be the value agreed on by the partners. Debit to Equipment Account = $29,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 66. Luke and John share income and losses in a 2:1 ratio after allowing for salaries of $48,000 to Luke and $60,000 to John. Net income for the partnership is $93,000. Income should be divided as a. Luke, $46,500; John, $46,500 b. Luke, $55,000; John, $38,000 c. Luke, $65,000; John, $28,000 d. Luke, $38,000; John, $55,000 ANSWER: RATIONALE:

d Net Loss after Salary Allowance = Total Salary Paid to Luke and John – Net Income of Partnership = ($48,000 + $60,000) – $93,000 = $15,000 Luke's Share of Loss = $15,000 × (2/3) = $10,000 Luke's Net Income = Luke's Salary – Luke's Share of Loss = $48,000 – $10,000 = $38,000 John's Share of Loss = $15,000 × (1/3) = $5,000 John's Net Income = John's Salary – John's Share of Loss = $60,000 – $5,000 = $55,000 Income should be divided as : Luke, $38,000; John, $55,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 67. As part of the initial investment, Jackson contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $3,000 is deemed completely worthless. For the remaining accounts, the partnership will establish a provision for possible future uncollectible accounts of $1,500. The amount debited to Accounts Receivable for the new partnership is a. $18,000 b. $22,500 c. $21,000 d. $19,500 ANSWER: RATIONALE:

d Amount of Debit to Accounts Receivable = Accounts Receivable Contributed by Partner – Worthless Accounts Receivable = $22,500 – $3,000 = $19,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 68. Jordon and Heidi share income equally. For the current year, the partnership net income is $40,000. Jordon made withdrawals of $14,000, and Heidi made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Jordon, Capital, $40,000; Heidi, Capital, $58,000. Jordon’s apital account balance at the end of the year is a. $68,000 b. $54,000 c. $74,000 d. $46,000 ANSWER: RATIONALE:

d Jordon's Capital Account Balance at End of Year = Beginning Capital Account Balance + Share of Partnership Net Income – Withdrawals = $40,000 + ($40,000/2) – $14,000 = $46,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 69. Sadie and Sam share income equally. For the current year, the partnership net income is $40,000. Sadie made withdrawals of $14,000 and Sam made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Sadie, Capital, $42,000; Sam, Capital, $58,000. Sam’s capital account balance at the end of the year is a. $78,000 b. $43,000 c. $63,000 d. $93,000 ANSWER: RATIONALE:

c Sam's Capital Account Balance at End of Year = Beginning Capital Account Balance + Share of Partnership Net Income – Withdrawals = $58,000 + ($40,000/2) – $15,000 = $63,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 9:59 AM 70. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios because a. partners seldom contribute time and resources equally b. this method reflects the amount of time devoted to the partnership by the partners c. it is simpler than following the legal rules d. it prevents arguments among the partners ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 71. A ratio of 4:2:1 is the same as a. 40%:20%:10% b. 4/7:2/7:1/7 c. 4/10:2/10:1/20 d. 7/4:7/2:7/1 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b A ratio of 4:2:1 = 4/(4 + 2 + 1):2/(4 + 2 + 1):1/(4 + 2 + 1) = 4/7:2/7:1/7 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 72. Carrie and Callie form a partnership in which Carrie contributes $85,000 in assets and agrees to devote half time to the partnership. Callie contributed $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Carrie and Callie share in the division of income? a. 5:8.5 b. 1:2 c. 1:1 d. 2:1 ANSWER: RATIONALE:

c If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Therefore, Carrie and Callie will share their income in 1:1 ratio. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 73. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investments at 15%; salary allowances of $24,000 and $20,000, respectively; and the remainder to be divided equally. How much of the net income of $90,000 is allocated to Seth? a. $42,750 b. $47,750 c. $45,000 d. $43,250 ANSWER: RATIONALE:

d Excess of Income over Allowances = Net Income – Interest on Original Investments – Salary Allowances = $90,000 – [(15% × $50,000) + (15% × $100,000)] – ($24,000 + $20,000) = $90,000 – $22,500 – $44,000 = $23,500 Seth's Share of Net Income = Interest on Original Investments + Salary Allowance + Half of Remaining Profit = (15% × $50,000) + $24,000 + (1/2 × $23,500) = $43,250 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 74. Seth and Beth have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $42,000 is allocated to Seth? a. $20,000 b. $23,000 c. $32,000 d. $0 ANSWER: RATIONALE:

b Excess of Income over Allowances = Net Income – Interest on Original Investments – Salary Allowances = $42,000 – [(10% × $50,000) + (10% × $100,000)] – ($27,000 + $18,000) = $42,000 – $15,000 – $45,000 = ($18,000) Seth's Share = Interest on Original Investments + Salary Allowance – Half of Net Loss Seth's Share = (10% × $50,000) + $27,000 – (1/2 × $18,000) = $23,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 75. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder divided equally. How much of the net loss of $16,000 is allocated to Seth? a. $8,000 b. $6,000 c. $4,000 d. $16,000 ANSWER: RATIONALE:

b Net Loss after Allowances = Net Loss + Interest on Original Investments + Salary Allowances = $16,000 + [(10% × $50,000) + (10% × $100,000)] + ($27,000 + $18,000) = $16,000 + $15,000 + $45,000 = $76,000 Seth's Share of Loss = Half of Net Loss – Interest on Original Investments + Salary Allowance Seth's Share of Loss = [(1/2 × ($76,000)] – [(10% × $50,000) + $27,000] = $6,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 76. If there is no written agreement as to the way income will be divided among partners, a. they will share income and losses equally b. they will share income and losses according to their capital balances c. they will share income and losses according to the time devoted to the business d. there really is no partnership agreement ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 77. Jefferson has a capital balance of $65,000 and devotes full time to a partnership. Washington has a capital balance of $45,000 and devotes half time to the partnership. If no other information is available regarding distributions, in what ratio is net income to be divided? a. 6.5:4.5 b. 1:1 c. 4.5:6.5 d. 1:2 ANSWER: RATIONALE:

b If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Therefore, the net income is to be divided in the ratio of 1:1. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 78. Details of the division of net income for a partnership should be disclosed in the a. Assets section of the balance sheet b. partners’ subsidiary ledger c. statement of cash flows d. partnership income statement ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 79. Patty and Paul are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $120,000 b. $146,000 c. $164,000 d. $160,000 ANSWER: RATIONALE:

b Paul's Capital Balance after Closing Entries = Capital Balance on January 1 + Paul's Share of Income = $130,000 + ($40,000 × 2/5) = $130,000 + $16,000 = $146,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:24 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 80. Rex and Kelsey are partners who share income in the ratio of 3:2. Their capital balances are $95,000 and $140,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Rex’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $71,000 b. $119,000 c. $146,000 d. $111,000 ANSWER: RATIONALE:

b Rex's Capital Balance after Closing Entries = Capital Balance on January 1 + Rex's Share of Income = $95,000 + ($40,000 × 3/5) = $95,000 + $24,000 = $119,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:25 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Use the information below to answer the questions that follow. Sandra and Kelsey are forming a partnership. Sandra will invest a piece of equipment with a book value of $7,500 and a fair market value of $18,000. Kelsey will invest a building with a book value of $40,000 and a fair market value of $44,000. 81. What amount will be recorded to the building account? a. $24,000 b. $14,000 c. $40,000 d. $44,000 ANSWER: RATIONALE:

d Amount recorded to the building account is equal to the fair market value of the building of $44,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Isis and Kelsey LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 82. What amount will be recorded to Sandra’s capital account? a. $18,000 b. $7,500 c. $25,500 d. $10,500 ANSWER: RATIONALE:

a Sandra's capital account is equal to the fair market value of her investment of $18,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Isis and Kelsey LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 83. What amount will be recorded to Kelsey’s capital account? a. $14,000 b. $24,000 c. $40,000 d. $44,000 ANSWER: RATIONALE:

d Kelsey's capital account balance is equal to the fair market value of his investment of $44,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Isis and Kelsey LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 84. Hannah Johnson contributed equipment, inventory, and $53,000 cash to a partnership. The equipment had a book value of $25,000 and a market value of $28,000. The inventory had a book value of $50,000 but only had a market value of $15,000 due to obsolescence. The partnership also assumed a $12,000 note payable owed by Hannah that was originally used to purchase the equipment. What amount should be recorded to Hannah’s capital account? a. $96,000 b. $84,000 c. $108,000 d. $116,000 ANSWER: RATIONALE:

b Hannah's Capital Account Balance = Hannah's Cash Contribution + Market Value of Hannah's Equipment Contribution + Market Value of Hannah's Inventory Contribution – Hannah's Note Payable Assumed by Partnership = $53,000 + $28,000 + $15,000 – $12,000 = $84,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 85. Henry Jones contributed equipment, inventory, and $44,000 cash to a partnership. The equipment had a book value of $35,000 and market value of $28,000. The inventory had a book value of $25,000 but only had a market value of $12,000 due to obsolescence. The partnership also assumed a $15,000 note payable owed by Henry that was originally used to purchase the equipment. What amount should be recorded to Henry’s capital account? a. $104,000 b. $89,000 c. $69,000 d. $84,000 ANSWER: RATIONALE:

c Henry's Capital Account Balance = Henry's Cash Contribution + Market Value of Henry's Equipment Contribution + Market Value of Henry's Inventory Contribution – Henry's Note Payable Assumed by Partnership = $44,000 + $28,000 + $12,000 – $15,000 = $69,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:29 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 86. Tanner and Teresa share income and losses in a 2:1 ratio after allowing for salaries of $42,000 to Tanner and $60,000 to Teresa. Net income of the partnership is $132,000. Income should be divided as follows: a. Tanner, $57,000; Teresa, $75,000 b. Tanner, $58,000; Teresa, $74,000 c. Tanner, $75,000; Teresa, $57,000 d. Tanner, $62,000; Teresa, $70,000 ANSWER: RATIONALE:

d Tanner: $42,000 + 2/3($132,000 – $42,000 – $60,000) = $62,000 Teresa: $60,000 + 1/3($132,000 – $42,000 – $60,000) = $70,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 87. Carla and Eliza share income equally. For the current year, the partnership net income is $40,000. Carla made withdrawals of $12,000, and Eliza made withdrawals of $21,000. At the beginning of the year, the capital account balances were: Carla, Capital, $42,000; Eliza, Capital, $55,000. Eliza’s capital account balance at the end of the year is a. $34,000 b. $54,000 c. $78,000 d. $75,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b 1/2($40,000) + $55,000 – $21,000 = $54,000 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 88. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $81,000 is allocated to Xavier? a. $37,000 b. $40,000 c. $42,000 d. $42,500 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b 20%($50,000) + $27,000 + 1/2($81,000 – $30,000 – $45,000) = $40,000 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 89. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Yolanda? a. $46,000 b. $61,000 c. $60,000 d. $66,000 ANSWER: RATIONALE:

b 20%($100,000) + $26,000 + 1/2($120,000 – $30,000 – $60,000) = $61,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 90. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Xavier? a. $59,000 b. $61,000 c. $49,000 d. $44,000 ANSWER: RATIONALE:

a 20%($50,000) + $34,000 + 1/2($120,000 – $30,000 – $60,000) = $59,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 91. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Yolanda? a. $77,000 b. $38,000 c. $36,000 d. $44,000 ANSWER: RATIONALE:

c 10%($100,000) + $28,000 + 1/2($77,000 – $15,000 – $66,000) = $36,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 92. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Xavier? a. $66,000 b. $41,000 c. $36,000 d. $43,000 ANSWER:

RATIONALE:

10%($50,000) + $38,000 + 1/2($77,000 – $30,000 – $66,000) = $41,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 93. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remaining income equally. How much of the net loss of $6,000 is allocated to Yolanda? a. $1,000 b. $3,000 c. $5,000 d. $0 ANSWER: RATIONALE:

c $5,000 (positive because the question is "how much of the net loss") 10%($100,000) + $18,000 + 1/2(–$6,000 – $15,000 – $45,000) = –$5,000

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/17/2017 6:49 PM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 94. Tucker and Titus are partners who share income in the ratio of 3:1. Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $40,000 for the year. What is Tucker’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $40,000 b. $70,000 c. $10,000 d. $80,000 ANSWER: RATIONALE:

b Tucker's Capital Account Balance = Capital Balance + Tucker's Share of Income = $40,000 + ($40,000 × 3/4) = $40,000 + $30,000 = $70,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:31 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 95. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Tomas’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $22,500 c. $57,500 d. $127,500 ANSWER: RATIONALE:

a Tomas's Capital Account Balance = Capital Balance + Tomas's Share of Income = $80,000 + ($30,000 × 3/4) = $80,000 + $22,500 = $102,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:10 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 96. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $120,000 c. $112,500 d. $127,500 ANSWER: RATIONALE:

d Saturn's Capital Account Balance = Capital Balance + Saturn's Share of Income = $120,000 + ($30,000 × 1/4) = $120,000 + $7,500 = $127,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:12 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 97. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $20,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $55,000 b. $75,000 c. $45,000 d. $65,000 ANSWER: RATIONALE:

d Saturn's Capital Account Balance = Capital Balance + Saturn's Share of Income = $60,000 + ($20,000 × 1/4) = $60,000 + $5,000 = $65,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:13 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 98. Franco and Jason share income and losses in a 2:1 ratio after allowing for salaries of $15,000 and $30,000, respectively. If the partnership suffers a $15,000 loss, by how much would Jason’s capital account increase? a. $10,000 b. $20,000 c. $40,000 d. $25,000 ANSWER: RATIONALE:

a Net Income after Salary Allowance = Partnership Loss – Total Salary Allowance = –$15,000 – ($15,000 + $30,000) = –$15,000 – $45,000 = –$60,000 Jason's Capital Increase = Share in Net Loss after Salary Allowance + Salary Allowance = (–$60,000 × 1/3) + $30,000 = –$20,000 + $30,000 = $10,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 99. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will Singer’s share of the income be if the income for the year is $50,000? a. $24,000 b. $22,000 c. $16,000 d. $23,400 ANSWER: RATIONALE:

b Income Remaining after Interest and Salary Allowances = $50,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $50,000 – $10,000 – $30,000 = $10,000 Singer's Share in Net Income = Interest on Original Investment + Salary Allowance + 3/5 Share in Remaining Income = (10% × $40,000) + $12,000 + ($10,000 × 3/5) = $4,000 + $12,000 + $6,000 = $22,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 100. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will McMann's share of the income be if the income for the year is $30,000? a. $20,000 b. $18,000 c. $18,600 d. $17,400 ANSWER: RATIONALE:

a Net Income Remaining after Interest and Salary Allowances = $30,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $30,000 – $10,000 – $30,000 = – $10,000 Net Income Allocated to McMann = Interest on Original Investment + Salary Allowance – 2/5 Share in Remaining Loss = (10% × $60,000) + $18,000 – ($10,000 × 2/5) = $6,000 + $18,000 – $4,000 = $20,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 101. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio, what will Singer’s share of the income (loss) be if the net loss for the year is $10,000? a. ($12,600) b. ($14,000) c. ($6,000) d. ($10,000) ANSWER: RATIONALE:

b Net Income Remaining after Interest and Salary Allowances = (–$10,000) – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = –$10,000 – $10,000 – $30,000 = ($50,000) Net Loss Allocated to Singer = 3/5 Share in Loss – (Interest on Original Investment + Salary Allowance) = [3/5 × ($50,000)] – [(10% × $40,000) + $12,000] = ($30,000) – ($4,000 + $12,000) = ($14,000) POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 102. Paul and Roger are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Roger’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $155,000 b. $150,000 c. $110,000 d. $115,000 ANSWER: RATIONALE:

b Roger's Capital Account Balance after Closing Entries = Capital Balance + Roger's Share of Income = $130,000 + ($50,000 × 2/5) = $130,000 + $20,000 = $150,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:41 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 103. Paul and Roger are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $108,000 b. $120,000 c. $115,000 d. $180,000 ANSWER: RATIONALE:

b Paul's Capital Account Balance after Closing Entries = Capital Balance + Paul's Share of Income = $90,000 + ($50,000 × 3/5) = $90,000 + $30,000 = $120,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:42 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 104. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income when there is no reference to division in the partnership agreement. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 ANSWER: RATIONALE:

a If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Jackson's Share of Net Income = $150,000 × 1/2 = $75,000 Campbell's Share of Net Income = $150,000 × 1/2 = $75,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 105. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of time devoted to business. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 ANSWER: RATIONALE:

c As Jackson devotes full time and Campbell devotes one-half time to the business, the ratio for net income division is 2:1. Jackson's Share = $150,000 × 2/3 = $100,000 Campbell's Share = $150,000 × 1/3 = $50,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 106. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of capital balances. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $50,000 and $100,000 ANSWER: RATIONALE:

b As Jackson devotes full time and Campbell devotes one-half time to the business, the ratio for net income division is 2:1. Jackson's Share = $150,000 × 1/4 = $37,500 Campbell's Share = $150,000 × 3/4 = $112,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 107. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will McMann’s share of the income be if the income for the year is $15,000? a. $6,000 b. $9,400 c. $12,600 d. $14,000 ANSWER: RATIONALE:

d Income Remaining after Interest and Salary Allowances = $15,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $15,000 – $10,000 – $30,000 = ($25,000) McMann's Share in Net Income = Interest on Original Investment + Salary Allowance + 2/5 Share in Remaining Income = (10% × $60,000) + $18,000 – ($25,000 × 2/5) = $6,000 + $18,000 – $10,000 = $14,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 108. Lambert invests $20,000 for a 1/3 interest in a partnership in which the other partners have capital totaling $34,000 before admitting Lambert. After distribution of the bonus, what is Lambert’s capital? a. $18,000 b. $20,000 c. $6,667 d. $11,333 ANSWER: RATIONALE:

a Total Owners’ Equity before Admitting Lambert = $34,000 Total Owners’ Equity after Admitting Lambert = $34,000 + $20,000 = $54,000 Lambert's Equity Interest after Admission = 1/3; Lambert's Capital = $54,000 × (1/3) = $18,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 109. Douglas pays Selena $45,000 for her 30% interest in a partnership with net assets of $125,000. Following this transaction, Douglas’s capital account should have a credit balance of a. $37,500 b. $45,000 c. $13,500 d. more than $45,000 ANSWER: RATIONALE:

a Douglas's Capital Account Balance = 30% of Total Net Assets = 30% × $125,000 = $37,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 110. Nick is admitted to an existing partnership by investing cash. Nick agrees to pay a bonus for his ownership interest because of the past success of the partnership. When Nick’s investment in the partnership is recorded, a. his capital account will be credited for more than the cash he invested b. his capital account will be credited for the amount of cash he invested c. a bonus will be credited for the amount of cash he invested d. a bonus will be distributed to the old partners' capital accounts ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:19 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 111. Bobbi and Stuart are partners. The partnership capital of Bobbi is $40,000 and that of Stuart is $70,000. Bobbi sells his interest in the partnership to John for $50,000. The journal entry to record the admission of John as a new partner would include a credit to a. John’s capital account for $40,000 b. Stuart’s capital account for $10,000 c. John’s capital account for $50,000 d. John’s capital account for $40,000 and a credit to Stuart’s capital account for $10,000 ANSWER: RATIONALE:

a The journal entry to record the admission of John as a new partner would include a credit to John's capital account, equal to Bobbi's capital, of $40,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 112. When a partner dies, the capital account balances of the remaining partners a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 113. A partner withdraws from a partnership by selling her interest to another person who currently is not associated with the firm. As a result of this transaction, the capital account balance of the other partners in the partnership a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 114. Samuel and Darci are partners. The partnership capital for Samuel is $50,000 and that of Darci is $60,000. Josh is admitted as a new partner by investing $50,000 cash. Josh is given a 20% interest in return for his investment. The amount of the bonus to the old partners is a. $0 b. $18,000 c. $8,000 d. $10,000 ANSWER: RATIONALE:

b Total Owners’ Equity before Admitting Josh = $50,000 + $60,000 = $110,000 Total Owners’ Equity after Admitting Josh = Josh's Investment + Existing Partnership Capital Total Owners’ Equity after Admitting Josh = $50,000 + $110,000 = $160,000 Josh's Capital in Partnership = 20% × Partnership's Total Capital = 20% × $160,000 = $32,000 Bonus to Old Partners = Josh's Investment in Partnership – Josh's Capital in Partnership Bonus to Old Partners = $50,000 – $32,000 = $18,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 115. Abby and Bailey are partners who share income in the ratio of 2:1 and have capital balances of $60,000 and $30,000, respectively. With the consent of Bailey, Sandra buys one-half of Abby's interest for $35,000. For what amount will Abby's capital account be debited to record admission of Sandra to the partnership? a. $40,000 b. $15,000 c. $35,000 d. $30,000 ANSWER: RATIONALE:

d Abby's Capital = $60,000 Share of Abby's Capital Purchased by Sandra = 1/2 Debit to Abby's Capital Account = $60,000 × (1/2) = $30,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 116. A new partner may be admitted to a partnership by a. inheriting a partnership interest b. contributing assets to the partnership c. purchasing a specific quantity of assets from the partnership d. a written approval under the federal law ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 117. A change in the ownership of a partnership results in the a. consolidating of the partnership b. liquidating of the partnership c. realization of the partnership d. dissolution of the partnership ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 118. When a new partner is admitted to a partnership, there should be a(n) a. revaluation of assets b. realization of assets c. allocation of assets d. return of assets ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 119. When a new partner is admitted to a partnership, there should be a(n) a. increase in the total assets of the partnership b. new capital account added to the ledger for the new partner c. increase in the total owners' equity of the partnership d. debit amount to the partner’s capital account for the cash received by the current partner ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 120. When an additional partner is admitted to a partnership by contribution of assets to the partnership, a. the total assets of the partnership do not change b. no liabilities can be contributed at the same time c. the amount of the cash contribution is the same as the amount of the debit to the new partner's capital account d. the total of the owners' equity accounts increases ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 121. When a new partner is admitted to a partnership, a. a bonus may be attributable to the old partner b. a bonus may only result from more cash being given by the new partner than the value of the assets being purchased c. a bonus agreed upon by the partners is recorded as an asset so long as the amount is within the range set by the SEC d. a bonus is not recorded ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 122. The Calvin-Dogwood Partnership owns inventory that was purchased for $90,000, has a current replacement cost of $85,900, and is priced to sell for $125,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $129,100 b. $85,900 c. $90,000 d. $125,000 ANSWER: RATIONALE:

b In the accounts of the new partnership, inventory should be valued at the current replacement cost of $85,900. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 123. Immediately prior to the admission of Abbott, the Smith-Jones Partnership assets had been adjusted to current market prices and the capital balances of Smith and Jones were $40,000 and $60,000, respectively. If the parties agree that the business is worth $120,000, what is the amount of bonus that should be recognized in the accounts at the admission of Abbott? a. $60,000 b. $80,000 c. $40,000 d. $20,000 ANSWER: RATIONALE:

d Amount of Bonus = Agreed Business Value – Total Capital before Abbott's Admission Amount of Bonus = $120,000 – ($40,000 + $60,000) = $120,000 – $100,000 = $20,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 124. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and $40,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benson’s capital balance after admitting Ramsey? a. $20,000 b. $24,000 c. $48,800 d. $71,200 ANSWER: RATIONALE:

c Total Owners’ Equity after Admitting Ramsey = $60,000 + $40,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Benson's Capital Balance after Ramsey's Admission = Benson's Existing Capital Balance – Share of Bonus to Ramsey = $60,000 – ($28,000 × 40%) = $60,000 – $11,200 = $48,800 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 125. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and $40,000, respectively. Ramsey is admitted to the partnership and is given a 10% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $44,800 b. $35,200 c. $20,000 d. $16,000 ANSWER: RATIONALE:

a Total Owners’ Equity after Admitting Ramsey = $60,000 + $40,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 10% × $120,000 = $12,000 Ramsey's Bonus to Existing Partners = Ramsey's Investment – Ramsey's Share in Owners’ Equity Ramsey's Bonus to Existing Partners = $20,000 – $12,000 = $8,000 Orton's Capital Balance after Ramsey's Admission = Orton's Existing Capital Balance + Share of Bonus from Ramsey = $40,000 + ($8,000 × 3/5) = $40,000 + $4,800 = $44,800 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 126. Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benton’s capital balance after admitting Ramsey? a. $20,000 b. $7,000 c. $70,000 d. $63,000 ANSWER: RATIONALE:

d Total Owners’ Equity after Admitting Ramsey = $70,000 + $30,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Benton's Capital Balance after Ramsey's Admission = Benton's Existing Capital Balance – Share of Bonus to Ramsey = $70,000 – ($28,000 × 1/4) = $70,000 – $7,000 = $63,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 127. Benson and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $20,000 b. $9,000 c. $70,000 d. $63,000 ANSWER: RATIONALE:

b Total Owners’ Equity after Admitting Ramsey = $70,000 + $30,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Orton's Capital Balance after Ramsey's Admission = Orton's Existing Capital Balance – Share of Bonus to Ramsey = $30,000 – ($28,000 × 3/4) = $30,000 – $21,000 = $9,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 128. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio, what will Singer’s share of the income be if the income for the year is $15,000? a. $9,000 b. $2,400 c. $1,000 d. $5,600 ANSWER: RATIONALE:

c Income Remaining after Interest and Salary Allowances = $15,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $15,000 – $10,000 – $30,000 = ($25,000) Singer's Share in Net Income = Interest on Original Investment + Salary Allowance + 3/5 Share in Remaining Income = (10% × $40,000) + $12,000 – ($25,000 × 3/5) = $4,000 + $12,000 – $15,000 = $1,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 129. Immediately prior to the admission of Allen, the Sanson-Jeremy Partnership assets had been adjusted to current market prices and the capital balances of Sanson and Jeremy were $80,000 and $120,000, respectively. If the parties agree that the business is worth $240,000, what is the amount of bonus that should be recognized in the accounts at the admission of Allen? a. $60,000 b. $80,000 c. $40,000 d. $100,000 ANSWER: RATIONALE:

c Amount of Bonus = Agreed Business Value – Total Capital before Allen's Admission = $240,000 – ($80,000 + $120,000) = $240,000 – $200,000 = $40,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 130. The Craig-Doran Partnership owns inventory that was purchased for $85,000, has a current replacement cost of $54,500, and is priced to sell for $98,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $98,000 b. $54,500 c. $85,000 d. $79,167 ANSWER: RATIONALE:

b In the accounts of the new partnership, inventory should be valued at the current replacement cost of $54,500. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 86

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 131. Alpha and Beta are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $50,000. What amount of loss on realization should be allocated to Alpha? a. $60,000 b. $20,000 c. $30,000 d. $50,000 ANSWER: RATIONALE:

b Loss on Realization Allocated to Alpha = 1/3(Total Capital – Cash Available) = 1/3 × ($110,000 – $50,000) = $20,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 132. Teri, Doug, and Brian are partners with capital balances of $20,000, $30,000, and $50,000, respectively. They share income and losses in the ratio of 3:2:1. Revenue accounts for the period total $350,000. Expense accounts for the period total $380,000. The revenue and expense accounts are closed to the capital accounts. Doug withdraws from the partnership. How much cash does he receive upon withdrawal? a. $30,000 b. $20,000 c. $40,000 d. $24,000 ANSWER: RATIONALE:

b Cash Received by Doug on Withdrawal = Doug's Capital – Doug's Share of Loss for the Period = $30,000 – (2/6 × $30,000) = $30,000 – $10,000 = $20,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/27/2017 9:57 AM 133. A partnership liquidation occurs when a. a new partner is admitted b. a partner dies c. the ownership interest of one partner is sold to a new partner d. the assets are sold, liabilities paid, and business operations terminated ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 134. The balance sheet of Morgan and Rockwell was as follows immediately prior to the partnership's liquidation: cash, $20,000; other assets, $160,000; liabilities, $40,000; Morgan, capital, $60,000; Rockwell, capital, $80,000. The other assets were sold for $139,000. Morgan and Rockwell share profits and losses in a 2:1 ratio. As a final cash distribution from the liquidation, Morgan will receive cash totaling a. $46,000 b. $51,000 c. $60,000 d. $49,500 ANSWER: RATIONALE:

a Morgan's Capital Balance = Capital Balance Prior to Partnership's Liquidation – (Loss on Realization of Other Assets) = $60,000 – [2/3 × ($160,000 – $139,000)] = $60,000 – (2/3 × $21,000) = $60,000 – $14,000 = $46,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 135. Harriet, Mickey, and Zack decide to liquidate their partnership. All assets are sold, and the liabilities are paid. Following these transactions, the capital balances and profit and loss percentages are as follows: Harriet, $27,000 and 30%; Mickey, ($12,000) and 40%; Zack, $43,000 and 30%. Mickey is unable to contribute any assets to reduce the deficit. How much cash will Harriet receive as a result of the partnership liquidation? a. $27,000 b. $21,000 c. $23,400 d. $15,000 ANSWER: RATIONALE:

b Cash Received by Harriet = Harriet's Capital Balance – Allocation of Mickey's Deficiency = $27,000 – ($12,000 × 1/2) = $27,000 – $6,000 = $21,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 136. The remaining cash of a partnership (after creditors have been paid) upon liquidation is divided among partners according to their a. capital balances b. contribution of assets c. drawing balances d. income sharing ratio ANSWER: POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 137. A gain or loss on realization is divided among partners according to their a. income sharing ratio b. capital balances c. drawing balances d. contribution of assets ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 138. Adriana and Belen are partners who share income in the ratio of 3:2 and have capital balances of $50,000 and $90,000 at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $90,000. How much cash should be distributed to Adriana? a. $50,000 b. $20,000 c. $30,000 d. $45,000 ANSWER: RATIONALE:

b Cash Distributed to Adriana = Capital – Loss on Liquidation = $50,000 – [($50,000 + $90,000 – $90,000) × 3/5] = $50,000 – $30,000 = $20,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 139. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash is available for distribution to the partners? a. $120,000 b. $30,000 c. $40,000 d. $90,000 ANSWER: RATIONALE:

c Cash Available for Distribution = Everett's Capital + Ramona's Capital – Miguel's Deficiency = $50,000 + $30,000 – $40,000 = $40,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 140. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash should be distributed to Everett assuming that Miguel pays the deficiency? a. $50,000 b. $20,000 c. $30,000 d. $40,000 ANSWER:

RATIONALE:

Balance after realization Receipt of deficiency Balances Cash distributed

Cash

Liabilities

$40,000

40,000 $80,000 $(80,000)

Capital Everett Miguel Ramona (1/6) (2/6) (3/6)

$50,000

$50,000 $50,000

$(40,000) $30,000 40,000 $

0 $30,000 $30,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 141. Antonio and Barbara are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $80,000. What amount of loss on realization should be allocated to Barbara? a. $80,000 b. $10,000 c. $20,000 d. $30,000 ANSWER: RATIONALE:

c Amount of Loss on Realization Allocated to Barbara = (Capital Balance – Cash Balance) × 2/3 = ($40,000 + $70,000 – $80,000) × 2/3 = ($30,000) × 2/3 = $20,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 142. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Soledad? a. $60,000 b. $27,500 c. $92,500 d. $32,500 ANSWER: RATIONALE:

b Amount of Loss on Realization Allocated to Soledad = (Total Capital Balance – Cash Balance) × 1/4 = ($100,000 + $140,000 – $130,000) × 1/4 = $110,000 × 1/4 = $27,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 143. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000 at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Winston? a. $110,000 b. $97,500 c. $42,500 d. $82,500 ANSWER: RATIONALE:

d Amount of Loss on Realization Allocated to Winston = (Total Capital Balance – Cash Balance) × 3/4 = ($100,000 + $140,000 – $130,000) × 3/4 = $110,000 × 3/4 = $82,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 144. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $80,000, Macki’s capital account will a. decrease by $16,000 b. decrease by $24,000 c. increase by $24,000 d. decrease by $40,000 ANSWER: RATIONALE:

a Loss on Sale of Other Assets = $120,000 – $80,000 = $40,000 Loss Allocated to Macki = $40,000 × 2/5 = $16,000 Macki's capital will decrease by $16,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 145. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $50,000, and each partner is personally insolvent, Partner Macki will eventually receive cash of a. $0 b. $10,000 c. $12,000 d. $20,000 ANSWER: RATIONALE:

b Cash Capital

+ Other Assets = Liabilities +

Balance before realization

$20,000

$120,000

Add: Sale of noncash assets

50,000 (120,000)

Balance after realization Less: Payment of liabilities Balance after liabilities

$70,000 (60,000) $10,000

$60,000

Ken Macki (3/5) (2/5) $40,000 $40,000 (42,000)

(28,000) $(2,000) $12,000

$60,000 (60,000) $ 0 $(2,000) $12,000

Less: Ken’s deficiency allocated to Macki Cash distributed

$(10,000)

(2,000) $10,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 146. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $60,000, and both partners agree to make up any capital deficits with personal cash contributions, Partner Macki will eventually receive cash of a. $0 b. $4,000 c. $16,000 d. $24,000 ANSWER: RATIONALE:

c Cash Capital

Balance before realization Add: Sale of noncash assets Balance after realization Less: Payment of liabilities Balance after liabilities Cash distributed

+ Other Assets = Liabilities +

$20,000

$120,000

60,000

(120,000)

$80,000 (60,000) $20,000 (20,000)

$60,000

Ken (3/5) $40,000

Macki (2/5) $40,000

(36,000) $60,000 (60,000) $ 0

(24,000) $4,000 $16,000

$4,000 4,000

$16,000 16,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Use the information below to answer the questions that follow. The capital accounts of Harrison and Marti have balances of $160,000 and $110,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Harrison invested an additional $20,000. During the year, Harrison and Marti withdrew $96,000 and $78,000, respectively, and net income for the year was $264,000. The articles of partnership make no reference to the division of net income. 147. Based on this information, the statement of partners’ equity would show what amount in the capital account for Marti on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Harrison

Marti

$160,000 20,000 96,000 132,000

$110,000

$216,000

$164,000

78,000 132,000

*If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Harrison and Marti. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harrison and Marti LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 148. Based on this information, the statement of partners’ equity would show what amount in the capital account for Harrison on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: RATIONALE:

Harrison $160,000 20,000 96,000 132,000 $216,000

Marti $110,000

Beginning capital balance Add: Additional capital Less: Withdrawals 78,000 Add: Division of net income* 132,000 Closing capital account $164,000 * If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among the partners. Therefore, net income is divided equally between Harrison and Marti. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harrison and Marti LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 149. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Harrison Marti $160,000 $110,000 20,000 96,000 78,000 132,000 132,000 $216,000 $164,000

T he statement of partners’ equity would show total capital for the partnership of $216,000 + $164,000 = $380,000 on December 31. *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Harrison and Marti. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harrison and Marti LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Use the information below to answer the questions that follow. The capital accounts of Hawk and Martin have balances of $160,000 and $140,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Hawk invested an additional $10,000. During the year, Hawk and Martin withdrew $86,000 and $68,000, respectively, and net income for the year was $258,000. The articles of partnership make no reference to the division of net income. 150. Based on this information, the statement of partners’ equity would show what amount in the capital account for Martin on December 31? a. $173,000 b. $211,000 c. $201,000 d. $232,000 ANSWER: RATIONALE:

Hawk $160,000 10,000 86,000 129,000 $213,000

Martin $140,000

Beginning capital balance Add: Additional capital Less: Withdrawals 68,000 Add: Division of net income* 129,000 Closing capital account $201,000 *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Hawk and Martin. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Hawk and Martin LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 151. Based on this information, the statement of partners’ equity would show what amount in the capital account for Hawk on December 31? a. $211,600 b. $213,000 c. $201,000 d. $203,000 ANSWER: RATIONALE:

Hawk $160,000 10,000 86,000 129,000 $213,000

Martin $140,000

Beginning capital balance Add: Additional capital Less: Withdrawals 68,000 129,000 Add: Division of net income* Closing capital account $201,000 *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Hawk and Martin. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Hawk and Martin LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 152. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $384,600 b. $412,600 c. $404,000 d. $414,000 ANSWER: RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Hawk Martin $160,000 $140,000 10,000 86,000 68,000 129,000 129,000 $213,000 $201,000

The statement of partners’ equity would show total capital for the partnership of $213,000 + $201,000 = $414,000 on December 31. *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Hawk and Martin. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Hawk and Martin LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM Matching Match each statement to the appropriate term (a-h): a. Deficiency b. Realization c. Proprietorship d. Partnership e. Mutual agency f. Liquidation g. Income-sharing ratio h. Statement of partnership equity Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-04 - 12-04 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM 153. Where changes in partner capital accounts for a period of time are reported ANSWER: h POINTS: 1 154. The share of loss on realization is greater than the balance in partner capital ANSWER: a POINTS: 1 155. Each partner may act on behalf of the entire partnership so that the liabilities created by one partner become the liabilities of all partners ANSWER: e POINTS: 1 156. An association of two or more persons to own and manage a business for profit ANSWER: d POINTS: 1 157. Business owned by a single individual ANSWER: c POINTS: 1 158. A step during liquidation when partnership assets are sold ANSWER: b POINTS: 1 159. Used to divide the excess of allowances over loss when net losses occur ANSWER: g POINTS: 1 160. The winding-up process of a partnership ANSWER: f POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies

Match each statement to the appropriate term (a–h). a. Partnership b. Partnership agreement c. Distribution of remaining cash to partners d. Mutual agency e. Equally f. Death of a partner g. Liquidation h. Unlimited liability DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:23 AM 161. When a partnership cannot pay its debts with business assets, the partners must use personal assets to meet the debt ANSWER: h POINTS: 1 162. Agreement that is the contract between partners ANSWER: b POINTS: 1 163. A voluntary association of two or more persons who co-own a business for profit ANSWER: a POINTS: 1 164. Every partner can bind the business to a contract within the scope of the partnership’s regular business operations ANSWER: d POINTS: 1 165. The process of going out of business by selling the entity’s assets and paying its liabilities ANSWER: g POINTS: 1

Page 107

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 166. Without an agreement, the law will stipulate this method of sharing profits and losses ANSWER: e POINTS: 1 167. The final step in the liquidation of a partnership ANSWER: c POINTS: 1 168. Causes the closing of accounts and settling with a partner's estate ANSWER: f POINTS: 1 Subjective Short Answer 169. What is a partnership? List three advantages and three disadvantages of the partnership form of business organization. ANSWER:

A partnership is a voluntary association of two or more persons who co-own a business for profit. Advantages: Unlike a corporation, a partnership is easy to form, involves no legal procedures, and is less expensive to form. A partnership brings together capital and expertise of two or more individuals. Finally, partnerships pay no income taxes as corporations do.

Disadvantages: Some disadvantages of a partnership are mutual agency, which allows each partner to sign contracts in the name of the partnership, and unlimited liability, which makes each partner individually liable for all the debts of the partnership. Additionally, the limited life of a partnership requires a new agreement whenever there is a change to the existing partnership. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 108

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 170. Jesse and Tim form a partnership by combining the assets of their separate businesses. Jesse contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $180,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $58,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $2,000 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Tim contributes cash of $21,000 and merchandise inventory of $44,500. The partners agree that the merchandise inventory is to be valued at $48,000. Journalize the entries to record in the partnership accounts (a) Jesse’s investment and (b) Tim’s investment. ANSWER:

(a) Accounts Receivable Equipment Allowance for Doubtful Accounts Jesse, Capital

46,500 58,000

(b) Cash 21,000 Merchandise Inventory 48,000 Tim, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

2,000 102,500

69,000

Page 109

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 171. Barton and Fallows form a partnership by combining the assets of their separate businesses. Barton contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $190,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $85,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $1,500 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Fallows contributes cash of $28,500 and merchandise inventory of $55,500. The partners agree that the merchandise inventory is to be valued at $60,000. Journalize the entries to record in the partnership accounts (a) Barton’s investment and (b) Fallows’s investment. ANSWER:

(a) Accounts Receivable Equipment Allowance for Doubtful Accounts Barton, Capital

(b) Cash Merchandise Inventory Fallows, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

46,500 85,000 1,500 130,000 28,500 60,000 88,500

Page 110

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 172. Trevor Smith contributed equipment, inventory, and $54,000 cash to a partnership. The equipment had a book value of $30,000 and a market value of $36,000. The inventory had a book value of $60,000, but only had a market value of $20,000, due to obsolescence. The partnership also assumed a $17,000 note payable owed by Smith that was used originally to purchase the equipment. Provide the journal entry for Smith’s contribution to the partnership. ANSWER:

Cash

54,000

Inventory

20,000

Equipment

36,000

Notes Payable

17,000

Trevor Smith, Capital

93,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 111

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 173. Emmett and Sierra formed a partnership dividing income as follows: 1. Annual salary allowance to Emmett of $48,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emmett and Sierra had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $200,000. How much net income should be distributed to Emmett? ANSWER:

Salary Interest (8% × $25,000) Remaining income Total distribution to Emerson

$ 48,000 2,000 69,400* $119,400

*($200,000 – $48,000 – $2,000 – $11,200) × 50% = $69,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 112

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 174. Emerson and Dakota formed a partnership dividing income as follows: 1. Annual salary allowance to Emerson of $58,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emerson and Dakota had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $220,000. How much net income should be distributed to Dakota? ANSWER:

Salary Interest (8% × $140,000) Remaining income Total distribution to Emerson

$ 0 11,200 74,400* $85,600

*($220,000 – $58,000 – $2,000 – $11,200) × 50% = $74,400 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 175. Gavin invested $45,000 in the Jason and Kelly Partnership for ownership equity of $45,000. Prior to the investment, land was revalued to a market value of $320,000 from a book value of $200,000. Jason and Kelly share net income in a 1:2 ratio. (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Gavin. (a) Land Jason, Capital Kelly, Capital

ANSWER:

120,000 40,000 80,000

(b) Cash Gavin, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

45,000 45,000

176. The capital accounts of Heidi and Moss have balances of $90,000 and $65,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Heidi invested an additional $8,000. During the year, Heidi and Moss withdrew $40,000 and $32,000, respectively. Revenues were $540,000 and expenses were $420,000 for the year. The articles of partnership make no reference to the division of net income. Required Prepare a statement of partners’ equity for the (1) partnership of Heidi and Moss. (2)

Journalize the entries to: (a)

Close the revenue and expenses account.

(b)

Close the drawing accounts.

ANSWER:

(1) Heidi and Moss Statement of Partners’ Equity

Page 114

Chapter 12 - Accounting for Partnerships and Limited Liability Companies For the Year Ended December 31 Heidi Moss Total Capital, January 1 $90,000 $65,000 $155,000 Additional investment during the year 8,000 0 8,000 $98,000 $65,000 $163,000 Net income for the year 60,000 60,000 120,000 $158,000 $125,000 $283,000 Withdrawals during the year 40,000 32,000 72,000 Capital, December 31 $118,000 $93,000 $211,000

(2) (a) Revenues Heidi, Capital Moss, Capital Heidi, Capital Moss, Capital Expenses Heidi, Capital Moss, Capital

540,000 270,000 270,000 240,000 240,000 420,000 40,000 32,000

Heidi, Drawing Moss, Drawing

40,000 32,000

POINTS: DIFFICULTY:

Page 115

Chapter 12 - Accounting for Partnerships and Limited Liability Companies $35,000 40,000

Waverley Marquez

The following additional partner transactions took place during the year: (1)

In early January, Houston is admitted to the partnership by contributing $25,000 cash for a 25% interest.

(2)

Net income of $160,000 was earned. In addition, Waverley received a salary allowance of $30,000 for the year. The three partners agree to an income-sharing ratio equal to their capital balances after admitting Houston.

(3)

The partners’ withdrawals are equal to half of their respective distributions of income after salary (i.e., half their respective portions of the $130,000).

Required Prepare a statement of partnership equity for the year ended December 31. ANSWER: Miner Company Statement of Partnership Equity For the Year Ended December 31 Total Waverley, Marquez, Houston, Partnership Capital Capital Capital Capital Partnership capital, January 1

$35,000

$40,000

Salary allowance Remaining income Less: Partner withdrawals

0 30,000 45,500

0 0 52,000

$25,000 0 32,500

25,000 30,000 130,000

(22,750)

(26,000) (16,250)

(65,000)

Partnership capital, December 31

$87,750

$66,000

$41,250

$195,000

Admission of Houston

Admission of Houston: Equity of initial partners prior to admission Contribution by Houston Total Houston’s equity interest after admission Houston’s equity after admission Contribution by Houston No bonus

$ 75,000

$ 75,000 25,000 $100,000 × 25% $ 25,000 25,000 $ 0

Net income distribution: Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies

The income-sharing ratio is equal to the proportion of the capital balances after admitting Houston according to the partnership agreement: Waverley: $35,000/$100,000 = 35% Marquez: $40,000/$100,000 = 40% Houston: $25,000/$100,000 = 25% These ratios can be multiplied by the $130,000 remaining income ($160,000 – $30,000 salary allowance to Waverley) to distribute the earnings to the respective partner capital accounts. Withdrawals: The remaining income is distributed to the three partners. Waverley need not take the salary allowance as a withdrawal but may allow it to accumulate in the member equity account. POINTS: DIFFICULTY:

1 Bloom's: Applying Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 117

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 178. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $200,000 under each of the following independent assumptions: (a) (b) (c) (d) (e)

No agreement concerning division of net income Divided in the ratio of original capital investment Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3 Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally

Holly

Luke

Total

(a) Net income (1:1)

$100,000

$200,000

(b) Net income (3:1)

$150,000

$50,000

$200,000

$36,000 + $60,800 = $96,800

$12,000 + $48,000 + $91,200 = $152,000 = $103,200 $200,000

(d) Salary allowance + Remaining income (1:1) = Net income

$50,000 + $40,000 = $90,000

$70,000 + $120,000 + $40,000 = $80,000 = $110,000 $200,000

(e) Interest allowance + Salary allowance + Remaining income (1:1) = Net income

$36,000 + $50,000 + $16,000 = $102,000

$12,000 + $48,000 + $70,000 + $120,000 + $16,000 = $32,000 = $98,000 $200,000

ANSWER:

POINTS: DIFFICULTY:

Page 118

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 179. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $380,000 under each of the following independent assumptions: (a) (b) (c) (d) (e)

ANSWER: (a) Net income (1:1)

Holly $190,000

Luke $190,000

Total $380,000

(b) Net income (3:1)

$285,000

$95,000

$380,000

(c) Interest allowance + Remaining income (2:3) = Net income (d) Salary allowance + Remaining income (1:1) = Net income (e) Interest allowance + Salary allowance + Remaining income (1:1) = Net income

$36,000 + $12,000 + $48,000 + $132,800 = $199,200 = $332,000 = $168,800 $211,200 $380,000 $50,000 + $70,000 + $120,000 + $130,000 = $130,000 = $260,000 = $180,000 $200,000 $380,000 $36,000 + $12,000 + $48,000 + $50,000 + $70,000 + $120,000 + $106,000 = $106,000 = $212,000 = $192,000 $188,000 $380,000

POINTS: DIFFICULTY:

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 180. Gleason invested $90,000 in the James and Kirk Partnership for ownership equity of $90,000. Prior to the investment, land was revalued to a market value of $425,000 from a book value of $200,000. James and Kirk share net income in a 1:2 ratio. (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Gleason. ANSWER:

(a) Land James, Capital Kirk, Capital

225,000

(b) Cash 90,000 Gleason, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

75,000 150,000

90,000

Page 120

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 181. Gentry, sole proprietor of a hardware business, decides to form a partnership with Noel. Gentry’s accounts are as follows: Book Value $ 25,000 52,000 112,000 40,000 300,000 25,000 145,000

Cash Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable

Market Value $ 25,000 45,000 125,000 100,000 340,000 25,000 145,000

Noel agrees to contribute $80,000 for a 20% interest. Journalize the entries to record (a) Gentry’s investment and (b) Noel’s investment.

ANSWER:

(a) Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Gentry, Capital

25,000 45,000 125,000 100,000 340,000

(b) Cash 80,000 Gentry, Capital 29,000 Noel, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

25,000 145,000 465,000

109,000

Page 121

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 182. Brad Simmons, sole proprietor of a hardware business, decides to form a partnership with Rich Winter. Brad’s accounts are as follows: Book Value $ 30,000 55,000 112,000 40,000 500,000 25,000 125,000

Cash Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable

Market Value $ 30,000 45,000 135,000 100,000 540,000 25,000 125,000

Rich agrees to contribute $170,000 for a 20% interest. Journalize the entries to record (a) Brad’s investment and (b) Rich’s investment.

ANSWER:

(a) Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Brad Simmons, Capital

30,000 45,000 135,000 100,000 540,000

(b) Cash 170,000 Brad Simmons, Capital 4,000 Rich Winter, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

25,000 125,000 700,000

174,000

Page 122

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 183. Rodgers and Winter had capital balances of $60,000 and $90,000, respectively, at the beginning of the current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $30,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $110,000. (a) (b)

Present the Division of net income section of the income statement for the current year. Assuming that the net income had been $65,000 instead of $110,000, present the Division of net income section of the income statement for the current year.

ANSWER: (a) Net income

Division of net income: Salary allowance Interest allowance Remaining income Net income

$110,000 Rodgers

Winter

Total

$25,000 7,200 18,500 $50,700

$30,000 10,800 18,500 $59,300

$ 55,000 18,000 37,000 $110,000

(b) Net income Division of net income: Salary allowance Interest allowance Total Excess of allowances over net income Net income

$65,000

$25,000 7,200 $32,200 (4,000)

$30,000 10,800 $40,800 (4,000)

$55,000 18,000 $73,000 (8,000)

$28,200

$36,800

$65,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:42 AM 184. Sharp and Townson had capital balances of $60,000 and $120,000, respectively, on January 1 of the current year. On May 8, Sharp invested an additional $10,000 in the partnership. During the year, Sharp and Townson withdrew $25,000 and $45,000, respectively. The revenue account at the end of the year had a balance of $600,000, and the expense account had a balance of $510,000. Sharp and Townson have agreed to split net income on a 2:1 basis. Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies (a) (b)

Prepare the statement of partnership equity for the current year. Journalize the entries to close the revenue and expense accounts and the drawing accounts.

ANSWER:

(b) Revenue Sharp, Capital Townson, Capital

600,000 400,000 200,000

Sharp, Capital Townson, Capital Townson, Capital

340,000 170,000

Sharp, Capital Townson, Capital Sharp, Drawing Townson, Drawing (a)

25,000 45,000

510,000

25,000 45,000

Sharp and Townson Statement of Partnership Equity For the Year Ended December 31 Sharp Townson Capital, January 1 $ 60,000 $120,000 Additional investment during the year Net income for the year Withdrawals during the year Capital, December 31

10,000 0 $ 70,000 $120,000 60,000 30,000 $130,000 $150,000 25,000 45,000 $105,000 $105,000

Total $180,000 10,000 $190,000 90,000 $280,000 70,000 $210,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:45 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 185. Reardon and Reese had capital balances of $140,000 and $160,000, respectively, at the beginning of the current fiscal year. The partnership agreement provides for salary allowances of $25,000 and $35,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $120,000. (a) Present the Division of net income statement for the current year. (b) Assuming that the net income had been $76,000 instead of $120,000, present the Division of net income section of the income statement for the current year.

ANSWER:

(a) Net income

Division of net income: Salary allowance Interest allowance Remaining income Net income

$120,000 Reardon

Reese

Total

$25,000 16,800 12,000 $53,800

$35,000 19,200 12,000 $66,200

$ 60,000 36,000 24,000 $120,000

(b) Net income

$76,000

Division of net income: Salary allowance

$25,000

$35,000

$60,000

Interest allowance

16,800

19,200

36,000

$41,800

$54,200

$96,000

Total Excess of allowances over net income

(10,000) (10,000) (20,000)

Net income

$31,800

$44,200

$76,000

POINTS: DIFFICULTY:

Page 125

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 186. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $150,000 of net income under each of the following assumptions: (a) No agreement as to division of net income (b) In ratio of capital balances (c) In ratio of time devoted to business ANSWER:

(a)

Jackson Campbell $75,000 $75,000

(b)

$37,500

$112,500

(c)

$100,000

$50,000

Computations Jackson: 50% × $150,000 Campbell: 50% × $150,000 Jackson: 1/4 × $150,000 Campbell: 3/4 × $150,000 Jackson: 2/3 × $150,000 Campbell: 1/3 × $150,000

POINTS: DIFFICULTY:

Page 126

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 187. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $120,000 of net income under each of the following assumptions: (a) No agreement as to division of net income (b) In ratio of capital balances (c) In ratio of time devoted to business (d) Interest of 10% on capital balances and the remainder divided equally (e) Interest of 10% on capital balances, salaries of $40,000 to Jackson and $20,000 to Campbell, and the remainder divided equally ANSWER:

Jackson Campbell (a) $60,000 $60,000 (b)

$30,000

(c)

$80,000

(d)

$50,000

(e)

$60,000

Computations Jackson: 50% × $120,000 Campbell: 50% × $120,000 $90,000 Jackson: 1/4 × $120,000 Campbell: 3/4 × $120,000 $40,000 Jackson: 2/3 × $120,000 Campbell: 1/3 × $120,000 $70,000 Jackson: [(10% × $100,000) + (1/2 × $80,000)] Campbell: [(10% × $300,000) + (1/2 × $80,000)] $60,000 Jackson: [(10% × $100,000) + $40,000 + (1/2 × $20,000] Campbell: [(10% × $300,000) + $20,000 + (1/2 × $20,000]

POINTS: DIFFICULTY:

Page 127

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 188. Derek and Hailey, partners sharing net income in the ratio of 2:1, admit Ben to the partnership in accordance with the following agreement: (1) (2)

(3)

Merchandise inventory recorded in the partnership accounts at $62,500 is to be revalued at its current replacement price of $68,500. Ben invested $48,000 in cash for a 30% interest in the partnership, which has total net assets (assets minus liabilities) of $130,000 that includes the inventory revaluation and the cash invested by Ben. The income-sharing ratio of Derek, Hailey, and Ben is to be 2:1:1.

Required (a) Journalize the entries to record the revaluation of merchandise inventory and the admission of Ben to the partnership. (b) A few years later, the capital balances of Derek, Hailey, and Ben were $150,000, $90,000, and $55,000, respectively. At this time, Kacy is admitted to the partnership by the purchase of one-half of Derek’s interest for $80,000. Journalize the entry to record the admission of Kacy to the partnership.

ANSWER:

(a) Merchandise Inventory Derek, Capital Hailey, Capital

6,000

Cash Derek, Capital Hailey, Capital Ben, Capital

48,000

4,000 2,000

(b) Derek, Capital 75,000 Kacy, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 10:51 AM

6,000 3,000 39,000

75,000

Page 128

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 189. Malcolm has a capital balance of $90,000 after adjusting to fair market value. Celeste contributes $45,000 to receive a 25% interest in a new partnership with Malcolm. Determine the amount and recipient of the partner bonus.

ANSWER:

Equity of Malcom Celeste’s contribution Total equity after admitting Celeste Celeste’s equity interest Celeste’s equity after admission

$ 90,000 45,000 $135,000 × 25% $ 33,750

Celeste’s contribution Celeste’s equity after admission Bonus paid to Malcolm

$45,000 33,750 $11,250

POINTS: DIFFICULTY:

Page 129

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 190. After the tangible assets have been adjusted to current market prices, the capital accounts of Harper and Kahlil have balances of $60,000 and $90,000, respectively. Fay is to be admitted to the partnership, contributing $45,000 cash, for which she is to receive an ownership equity of $60,000. All partners share equally in income. Required (a) Journalize the entry to record the admission of Fay, who is to receive a bonus of $15,000. (b) What are the capital balances of each partner after the admission of the new partner? ANSWER: (a)

(b)

Cash Harper, Capital Kahlil, Capital Fay, Capital

45,000 7,500 7,500

Harper Kahlil Fay

$52,500 82,500 60,000

60,000

POINTS: DIFFICULTY:

Page 130

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 191. The capital accounts of Hope and Indiana have balances of $115,000 and $95,000, respectively. Clint and Casey are to be admitted to the partnership. Clint buys one-fifth of Hope’s interest for $30,000 and one-fourth of Indiana’s interest for $20,000. Casey contributes $45,000 cash to the partnership, for which he is to receive an ownership equity of $45,000. Required (1) Journalize the entries to record the admission of (a) Clint and (b) Casey. (2) What are the capital balances of each partner after the admission of the new partners?

ANSWER:

(1)(a)

(b)

Hope, Capital (20% × $115,000) Indiana, Capital (25% × $95,000) Clint, Capital

23,000 23,750

Cash

45,000

46,750

Casey, Capital (2)

Hope Indiana Clint Casey

45,000 $92,000 71,250 46,750 45,000

POINTS: DIFFICULTY:

Page 131

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 192. Benson contributed land, inventory, and $22,000 cash to a partnership. The land had a book value of $65,000 and a market value of $111,000. The inventory had a book value of $60,000 and a market value of $58,000. The partnership also assumed a $52,000 note payable owned by Benson that was used originally to purchase the land. Required Provide the journal entry for Benson’s contribution to the partnership.

ANSWER:

Cash Inventory Land Notes Payable Benson, Capital

22,000 58,000 111,000 52,000 139,000

POINTS: DIFFICULTY:

Page 132

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 193. Kala and Leah, partners in Best Designs, have capital balances of $40,000 and $60,000, respectively. Adam joins the partnership by buying one-half of Kala’s interest for $30,000. In addition, because of Adam’s outstanding sales skills, the partners agree to increase his interest to 40% if he invests another $10,000. The income-sharing ratio of Kala, Leah, and Adam is 4:3:1. (a) (b)

Journalize the entries to record the admission of Adam to the partnership. Immediately after Adam’s admission to the partnership, Leah sells one-fourth of her interest to Denton for $35,000. Journalize the entry to record this transaction.

ANSWER:

(a) Kala, Capital Adam, Capital

20,000

Cash Kala, Capital Leah, Capital Adam, Capital

10,000 8,000 6,000

20,000

(b) Leah, Capital 13,500 Denton, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

24,000

13,500

Page 133

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 194. Amazon invested $128,000 in the Jungle and River Partnership for ownership equity of $128,000. Prior to the investment, equipment was revalued to a market value of $90,000 from a book value of $72,000. Jungle and River share net income in a 2:1 ratio. Required (a) Provide the journal entry for the revaluation of equipment. (b) Provide the journal entry to admit Amazon. ANSWER:

(a) Equipment Jungle, Capital River, Capital

18,000

(b) Cash 128,000 Amazon, Capital POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

12,000 6,000

128,000

Page 134

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 195. Watson purchased one-half of Dalton’s interest in the Patton and Dalton Partnership for $45,000. Prior to the investment, land was revalued to a market value of $135,000 from a book value of $93,000. Patton and Dalton share net income equally. Dalton had a capital balance of $35,000 prior to these transactions. Required (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Watson. ANSWER:

(a) Land

42,000 Patton, Capital Dalton, Capital

(b) Dalton, Capital Watson, Capital

21,000 21,000 28,000 28,000*

*($35,000 + $21,000) × 50% POINTS: DIFFICULTY:

Page 135

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 196. Wonder purchased one-half of Darwin’s interest in the Todd and Darwin Partnership for $50,000. Prior to the investment, land was revalued to a market value of $175,000 from a book value of $100,000. Todd and Darwin share net income equally. Darwin had a capital balance of $40,000 prior to these transactions. Required (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Wonder. ANSWER:

(a) Land Todd, Capital Darwin, Capital

75,000

(b) Darwin, Capital Wonder, Capital

38,750

37,500 37,500

38,750*

*($40,000 + $37,500) × 50% POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 11:01 AM 197. S. Stephens and J. Perez are partners in Space Designs. Stephens and Perez share income equally. D. Fredericks will be admitted to the partnership. Prior to the admission, equipment was revalued downward by $8,000. The capital balances of each partner are $100,000 and $139,000, respectively, prior to the revaluation. Required (1) Provide the journal entry for the asset revaluation. (2)

Provide the journal entry for Fredericks’ admission under the following independent situations: (a) Fredericks purchased a 20% interest for $50,000. (b) Fredericks purchased a 30% interest for $125,000.

ANSWER: (1)

(2)

S. Stephens, Capital J. Perez, Capital Equipment

4,000 4,000

(a) Cash S. Stephens, Capital J. Perez, Capital

50,000 3,100 3,100

8,000

Page 136

Chapter 12 - Accounting for Partnerships and Limited Liability Companies D. Fredericks, Capital

56,200

Supporting calculations for the bonus: Equity of S. Stephens Equity of J. Perez Contribution by D. Fredericks Total equity after admitting D. Fredericks

$ 96,000 135,000 50,000 $281,000 × 20% $ 56,200 50,000 $ 6,200

D. Fredericks’ equity interest after admission D. Fredericks’ equity after admission Contribution by D. Fredericks Bonus paid to D. Fredericks

The bonus to Fredericks is debited equally between Stephens' and Perez’s capital accounts. (b)

125,000

Cash S. Stephens, Capital

9,100

J. Perez, Capital

9,100 106,800

D. Fredericks, Capital Supporting calculations for the bonus: Equity of S. Stephens

$ 96,000

Equity of J. Perez

135,000

Contribution by D. Fredericks

125,000

Total equity after admitting D. Fredericks

$356,000

D. Fredericks' equity interest after admission

D. Fredericks' equity after admission

$106,800

Contribution by D. Fredericks

$125,000

D. Fredericks' equity after admission

106,800

Bonus paid to S. Stephens and J. Perez

$ 18,200

30%

The bonus to Stephens and Perez is credited equally between Stephens’ and Perez’s capital accounts.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying

Page 137

Chapter 12 - Accounting for Partnerships and Limited Liability Companies QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 11:03 AM 198. Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000, respectively. The partnership assets were sold for $120,000. The partnership had no liabilities. Samuel and Brian share income and losses equally. Required (a) Determine the amount of Samuel’s deficiency. (b) Determine the amount distributed to Brian, assuming Samuel is unable to satisfy the deficiency. ANSWER: (a)

Samuel’s equity prior to liquidation Realization of asset sale Book value of assets ($60,000 + $240,000) Loss on liquidation Samuel’s share of loss (50% × $180,000) Samuel’s deficiency

$ 60,000 $ 120,000 300,000 $(180,000) (90,000) $ (30,000)

(b)

$120,000 = $240,000 – $90,000 share of loss – $30,000 Samuel’s deficiency, also equals the amount of cash realized from sale of the partnership assets.

POINTS: DIFFICULTY:

Page 138

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 199. Prior to liquidating their partnership, Craig and Jenny had capital accounts of $70,000 and $110,000, respectively. The partnership assets were sold for $285,000. The partnership had $25,000 of liabilities. Craig and Jenny share income and losses equally. Determine the amount received by Jenny as a final distribution from liquidation of the partnership. ANSWER:

Jenny’s equity prior to liquidation Realization of asset sales Book value of assets ($180,000 + $25,000) Gain on liquidation Jenny’s share of gain (50% × $80,000) Jenny’s cash distribution

$110,000 $285,000 205,000 $80,000 40,000 $150,000

POINTS: DIFFICULTY:

Page 139

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 200. Prior to liquidating their partnership, Porter and Robert had capital account balances of $160,000 and $100,000, respectively. Prior to liquidation, the partnership had no cash assets other than what was realized from the sale of the partnership assets. These partnership assets were sold for $250,000. The partnership had $10,000 of liabilities. Porter and Robert share income and losses equally. Required Determine the amount received by Porter as a final distribution from liquidation of the partnership. ANSWER:

Porter’s equity prior to liquidation

$160,000

Realization of asset sales

$250,000

Book value of assets ($160,000 + $100,000 + $10,000)

270,000

Loss on liquidation

$(20,000)

Porter’s share of loss (50% × $20,000)

$(10,000)

Porter’s cash distribution

$150,000

POINTS: DIFFICULTY:

Page 140

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 201. Immediately prior to the process of liquidation, partners Micco, Niccum, and Orwell have capital balances of $70,000, $20,000, and $30,000, respectively. There is a cash balance of $10,000, noncash assets total $160,000, and liabilities total $50,000. The partners share net income and losses in the ratio of 2:2:1. Journalize the entries to record the liquidation outlined below, using Assets as the account title for the noncash assets and Liabilities as the account title for all creditors' claims. (a) Sold the noncash assets for $80,000 in cash. (b) Divided the loss on realization. (c) Paid the liabilities. (d) Received cash from the partner with the deficiency. (e) Distributed the cash to the partners. ANSWER:

(a) Cash Loss on Realization Assets

80,000 80,000

(b) Micco, Capital Niccum, Capital Orwell, Capital Loss on Realization

32,000 32,000 16,000

50,000

(d) Cash Niccum, Capital

12,000

(e) Micco, Capital Orwell, Capital Cash

38,000 14,000

160,000

80,000

50,000

12,000

52,000

POINTS: DIFFICULTY:

Page 141

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 202. Hamir, Darci, and Pete are partners sharing income in the ratio of 3:2:1. After the firm’s loss from liquidation is distributed, the capital account balances were Hamir, $45,000 Dr.; Darci, $90,000 Cr., and Pete, $64,000 Cr. If Hamir is personally bankrupt and unable to pay any of the $45,000, what will be the amount of cash received by Darci and Pete upon liquidation? Show your work. ANSWER: Capital balances after realization Distribution of partner deficiency Capital balances after deficiency distribution

Hamir Darci Pete $(45,000) $90,000 $64,000 45,000(30,000)1 (15,000)2 $

$60,000 $49,000 0

1$45,000 × 2/3 2$45,000 × 1/3

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/3/2017 11:05 AM 203. After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of the partnership of Anna, Brian, and Cole indicated the following: Cash Noncash Assets Liabilities Anna, Capital Brian, Capital Cole, Capital

$ 7,500 105,000

$112,500

$ 27,500 45,000 15,000 25,000 $112,500

The partners share net income and losses in the ratio of 3:2:1. Between May 7 and May 30, the noncash assets were sold for $150,000, the liabilities were paid, and the remaining cash was distributed to the partners. (a) (b)

Prepare a statement of partnership liquidation. Assume the same facts as in (a), except that the noncash assets were sold for $45,000 and any partner with a capital deficiency pays the amount of the deficiency to the partnership. Prepare a statement of partnership liquidation.

ANSWER:

(a)

Page 142

Chapter 12 - Accounting for Partnerships and Limited Liability Companies Statement of Partnership Liquidation For Period May 7–30 Capital Noncash

Anna

Brian Cole

Cash +Assets = Liabilities + (3/6) + (2/6) + (1/6) Balances before realization $ 7,500 $105,000 Sale of assets and division of gain +150,000 –105,000 Balances after realization $157,500 $ 0 Payment of liabilities –27,500 Balances after payment of liabilities $130,000 $ 0 Distribution of cash to partners –130,000 Final balances $ 0 $ 0

$27,500 $45,000$15,000$25,000

+ 22,500+15,000 + 7,500

$27,500 $67,500$30,000$32,500 – 27,500

0 $67,500$30,000$32,500

– 67,500–30,000–32,500 $

0 $

(b) Anna, Brian, and Cole Statement of Partnership Liquidation For Period May 7–30 Capital Noncash

Anna Brian Cole

Cash +Assets =Liabilities + (3/6) + (2/6) + (1/6) Balances before realization $ 7,500 $105,000 Sale of assets and division of loss +45,000 –105,000 Balances after Copyright Cengage Learning. Powered by Cognero.

$27,500$45,000 $15,000$25,000

–30,000 –20,000–10,000

Page 143

Chapter 12 - Accounting for Partnerships and Limited Liability Companies realization $52,500 $ Payment of liabilities –27,500 Balances after payment of liabilities $25,000 $ Receipt of deficiency + 5,000 Balances $30,000 $

$27,500$15,000$(5,000)$15,000 – 27,500

0$15,000$(5,000)$15,000 + 5,000

Distribution of cash to partners –30,000 Final balances

0$15,000 $

0$15,000

–15,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 2/26/2017 10:47 AM

Page 144

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 204. Top Dog, LLC provides repair services for oil rigs. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Year 1 Year 2 Revenues (in thousands) $60,525 $58,500 Number of employees 120 160 Required (a) For Year 1 and Year 2, determine the revenue per employee (excluding members). (b) Interpret the trend between the two years. ANSWER:

(a)

Revenue per employee, Year 1: $60,525,000/120 = $504,375 Revenue per employee, Year 2: $58,500,000/160 = $365,625

(b)

Revenues increased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $504,375 in Year 1 to $365,625 in Year 2. This indicates that the efficiency of the firm has declined in the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.12-06 - 12-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:09 PM DATE MODIFIED: 3/17/2017 6:51 PM

Page 145

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 205. Easy Sailing, LLC provides repair services for commercially owned boats and yachts. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Year 1 $50,625 125

Revenues (in thousands) Number of employees

Year 2 $57,750 175

Required (a) For Year 1 and Year 2, determine the revenue per employee (excluding members). (b) Interpret the trend between the two years. ANSWER:

(a)

Revenue per employee, Year 1: $50,625,000/125 = $405,000 Revenue per employee, Year 2: $57,750,000/175 = $330,000

(b)

Revenues increased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $405,000 in the first year to $330,000 in the second year. This indicates that the efficiency of the firm has declined in the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees.

POINTS: DIFFICULTY:

Page 146

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends True / False 1. Twenty percent of all businesses in the United States are corporations, and they account for 80% of the total business dollars generated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:51 AM 2. A corporation is a separate entity for accounting purposes but not for legal purposes. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

Page 1

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 3. The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the stockholder. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 4. Under the Internal Revenue Code, corporations are required to pay federal income taxes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

Page 2

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 5. Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:53 AM 6. The initial owners of stock of a newly formed corporation are called directors. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

Page 3

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 7. While some businesses have been granted charters under state laws, most businesses receive their charters under federal laws. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 8. Organizational expenses are classified as intangible assets on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic TOPICS: Bloom's: Remembering DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

Page 4

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 9. The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 10. Retained Earnings represents past net income less past dividends; therefore, any balance in this account would be listed on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:54 AM

Page 5

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 11. The net increase or decrease in Retained Earnings for a period is recorded by closing entries. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:55 AM 12. The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 13. A deficit in Retained Earnings is reported in the Stockholders' equity section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:56 AM 14. When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 15. The par value of common stock must always be equal to its market value on the date the stock is issued. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:25 AM 16. For accounting purposes, stated value is treated the same way as par value. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 17. The issuance of common stock affects both paid-in capital and retained earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 18. The main source of paid-in capital is from issuing stock. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 19. The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 20. The amount of capital paid in by the stockholders of the corporation is called legal capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

Page 10

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 21. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share would be $4. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Dividends per Share = $50 × 8% = $4 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:27 AM 22. If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 43,000. a. True b. False ANSWER: RATIONALE:

False Number of Outstanding Shares = Number of Shares Issued – Number of Shares Reacquired = 41,000 – 2,000 = 39,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:29 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 23. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:57 AM 24. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common stockholders. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:31 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 25. Paid-in capital may originate from real estate transactions. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:58 AM 26. The par value of stock is an assigned per-share amount defined in many states as legal capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 27. A large public corporation normally uses registrars and transfer agents to maintain the records of stockholders. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:59 AM 28. When common stock is issued in exchange for land, the land should be recorded in the accounts at the par value of the stock issued. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 29. When a corporation issues stock at a premium, it reports the premium as an Other income item on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:00 AM 30. When no-par stock is issued, Common Stock is credited for the selling price of the stock issued. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 31. A large retained earnings account means that there is cash available to pay dividends. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:36 AM 32. When the board of directors declares a cash or stock dividend, this action decreases retained earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 33. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000. a. True b. False ANSWER: RATIONALE:

False Number of Outstanding Shares = Number of Shares Issued – Number of Shares Held as Treasury Stock = 15,000 – 500 = 14,500 Amount of Cash Dividend = Number of Outstanding Shares × Dividends per Share = 14,500 × $1 = $14,500 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:39 AM 34. The declaration of a cash dividend decreases a corporation's stockholders equity and decreases its assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 35. One of the prerequisites to paying a cash dividend is sufficient retained earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:41 AM 36. Cash dividends become a liability to a corporation on the date of record. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 37. The declaration and issuance of a stock dividend do not affect the total amount of a corporation's assets, liabilities, or stockholders' equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:02 AM 38. The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 39. Before a stock dividend can be declared or paid, there must be sufficient cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:44 AM 40. The day on which the board of directors of the corporation distributes a dividend is called the declaration date. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 41. A 10% stock dividend will increase the number of shares outstanding, but the book value per share will decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:04 AM 42. The stock dividends distributable account is listed in the Current liabilities section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:04 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 43. A corporation has 10,000 shares of $100 par stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 40,000. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Number of Shares Outstanding after Split = 10,000 shares × 5 = 50,000 shares 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 10:37 PM DATE MODIFIED: 2/22/2017 12:01 AM 44. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 10:42 PM DATE MODIFIED: 2/22/2017 12:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 45. The reduction in the par or stated value of common stock, accompanies by the issuance of a proportionate number of additional shares, is called a stock split. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 10:45 PM DATE MODIFIED: 2/22/2017 12:03 AM 46. A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Market Value of Stock after Split = $150/4 = $37.50 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 10:49 PM DATE MODIFIED: 2/22/2017 12:03 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 47. A stock split results in a transfer at market value from retained earnings to paid-in capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/21/2017 10:52 PM DATE MODIFIED: 2/22/2017 12:04 AM 48. Cash dividends are normally paid on shares of treasury stock. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:23 PM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 49. The cost method of accounting for the purchase and sale of treasury stock is a commonly used method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:41 PM 50. Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the stock was originally issued are important. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:42 PM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 51. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:43 PM 52. A sale of treasury stock may result in a decrease in paid-in capital. All decreases should be charged to Paid-In Capital from Sale of Treasury Stock. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 53. Treasury Stock is listed in the Stockholders' equity section on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 12:05 AM 54. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific purpose. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:48 PM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 55. A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:49 PM 56. The amount of a corporation's retained earnings that has been restricted/appropriated should be reported in the notes to the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 57. The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:51 PM 58. The retained earnings statement may be combined with the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:52 PM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 59. If paid-in capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-in capital in excess of par/common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 (deficit), total stockholders' equity is $880,000. a. True b. False ANSWER: RATIONALE:

False Total Stockholders' Equity = Preferred Stock + Paid-In Capital in Excess of Par/Preferred Stock + Common Stock + Paid-In Capital in Excess of Par/Common Stock + Retained Earnings = $200,000 + $30,000 + $525,000 + $20,000 + (–$105,000) = $670,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 11:54 PM 60. If a company has preferred stock, the preferred stock dividend is added to net income when computing earnings per common share. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Multiple Choice 61. Which of the following is not a characteristic of a corporation? a. The financial loss that a stockholder may suffer from owning stock in a public company is limited. b. Cash dividends paid by a corporation are deductible as expenses by the corporation. c. A corporation can own property in its name. d. Corporations are required to file federal income tax returns. ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 62. Characteristics of a corporation include a. shareholders who are mutual agents b. direct management by the shareholders (owners) c. its inability to own property d. shareholders who have limited liability ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 63. One of the main disadvantages of the corporate form is the a. professional management b. double taxation of dividends c. charter d. requirement to stock ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 64. A disadvantage of the corporate form of business entity is a. mutual agency for stockholders b. unlimited liability for stockholders c. corporations are subject to more governmental regulations d. the ease of transfer of ownership ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 65. Under the corporate form of business organization, a. ownership rights are easily transferred b. a stockholder is personally liable for the debts of the corporation c. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation d. stockholders wishing to sell their corporate shares must get the approval of other stockholders ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:54 AM 66. Those most responsible for the major policy decisions of a corporation are the a. management b. board of directors c. employees d. stockholders ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 67. Which of the following would not be considered an advantage of the corporate form of organization? a. government regulation b. separate legal existence c. continuous life d. limited liability of stockholders ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 12:50 AM 68. Which of the following is not true of a corporation? a. It may enter into binding legal contracts in its own name. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may buy, own, and sell property. ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 69. The ability of a corporation to obtain capital is a. less than the ability of a partnership b. about the same as the ability of a partnership c. restricted because of the limited life of the corporation d. enhanced because of limited liability and ease of share transferability ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 70. Which of the following statements concerning taxation is accurate? a. Corporations pay federal income taxes but not state income taxes. b. Corporations pay federal and state income taxes. c. Only the owners must pay taxes on corporate income. d. Corporations pay income taxes but their owners do not. ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 71. The term deficit is used to refer to a debit balance in which of the following accounts of a corporation? a. Retained Earnings b. Treasury Stock c. Organizational Expenses d. Common Stock ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 72. Stockholders' equity a. is usually equal to cash on hand b. includes paid-in capital and liabilities c. includes retained earnings and paid-in capital d. is shown on the income statement ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 73. The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of stock is called a. treasury stock b. issued stock c. outstanding stock d. authorized stock ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM 74. Which of the following is not a right possessed by common stockholders of a corporation? a. the right to vote in the election of the board of directors b. the right to receive a minimum amount of dividends c. the right to sell their stock to anyone they choose d. the right to share in assets upon liquidation ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 75. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 10,000 were subsequently reacquired. What is the number of shares outstanding? a. 10,000 b. 40,000 c. 30,000 d. 50,000 ANSWER: RATIONALE:

c Number of Shares Outstanding = Number of Shares Originally Issued – Number of Shares Reacquired = 40,000 – 10,000 = 30,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:56 AM 76. The par value per share of common stock represents the a. minimum selling price of the stock established by the articles of incorporation b. minimum amount the stockholder will receive when the corporation is liquidated c. dollar amount assigned to each share d. amount of dividends per share to be received each year ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 77. Nebraska Inc. issues 3,000 shares of common stock for $45,000. The stock has a stated value of $10 per share. The journal entry to record the stock issuance would include a credit to Common Stock for a. $30,000 b. $45,000 c. $15,000 d. $3,000 ANSWER: RATIONALE:

a Amount of Common Stock Issued = Number of Shares Issued × Par Value of Each Share = 3,000 × $10 = $30,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:58 AM 78. The excess of issue price over par of common stock is termed a(n) a. discount b. income c. deficit d. premium ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 79. The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to a. Organizational Expenses b. Goodwill c. Common Stock d. Cash ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 12:59 AM 80. The price at which a stock can be sold depends on a number of factors. Which of the following is not one of those factors? a. the financial condition, earnings record, and dividend record of the corporation b. investor expectations of the corporation's earning power c. how high the par value is d. general business and economic conditions and prospects ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 81. The entry to record the issuance of common stock at a price above par includes a debit to a. Organizational Expenses b. Common Stock c. Cash d. Paid-In Capital in Excess of Par—Common Stock ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:03 AM 82. Kansas Company acquired a building valued at $210,000 for property tax purposes in exchange for 12,000 shares of its $5 par common stock. The stock is widely traded and selling for $15 per share. At what amount should the building be recorded by Kansas Company? a. $60,000 b. $180,000 c. $210,000 d. $120,000 ANSWER: RATIONALE:

b Value of Building = Market Price of Shares × Number of Shares Exchanged = $15 × 12,000 = $180,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:46 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 83. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 30,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding? a. 35,000 b. 70,000 c. 25,000 d. 30,000 ANSWER: RATIONALE:

c Number of Shares Outstanding = Number of Shares Originally Issued – Number of Shares Reacquired = 30,000 – 5,000 = 25,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:00 AM 84. Par value a. is the monetary value assigned per share in the corporate charter b. represents what a share of stock is worth c. represents the original selling price for a share of stock d. is established for a share of stock after it is issued ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/21/2017 10:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 85. The authorized stock of a corporation a. must be recorded in a formal accounting entry b. only reflects the initial capital needs of the company c. is indicated in its bylaws d. is indicated in its charter ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:07 AM 86. If Dakota Company issues 1,500 shares of $6 par common stock for $75,000, a. Common Stock will be credited for $75,000 b. Paid-In Capital in Excess of Par will be credited for $9,000 c. Paid-In Capital in Excess of Par will be credited for $66,000 d. Cash will be debited for $66,000 ANSWER: RATIONALE:

c Total Cash Raised through Issue of Shares = $75,000 Par Value of Common Stock Issued = 1,500 shares × $6 = $9,000 Paid-In Capital in Excess of Par = $75,000 – $9,000 = $66,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:01 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 87. If common stock is issued for an amount greater than par value, the excess should be credited to a. Retained Earnings b. Cash c. Legal Capital d. Paid-In Capital in Excess of Par ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:09 AM 88. Sneed Corporation issues 10,000 shares of $50 par preferred stock for cash at $75 per share. The entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to a. Preferred Stock for $750,000 b. Preferred Stock for $500,000 and Paid-In Capital in Excess of Par—Preferred Stock for $250,000 c. Preferred Stock for $500,000 and Retained Earnings for $250,000 d. Paid-In Capital from Preferred Stock for $750,000 ANSWER: RATIONALE:

b Total Cash Raised through Issue of Shares = 10,000 × $75 = $750,000 Par Value of Preferred Stock Issued = Number of Shares Issued × Par Value of Each Share = 10,000 × $50 = $500,000 Paid-In Capital in Excess of Par—Preferred Stock = $750,000 – $500,000 = $250,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:02 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 89. Alma Corp. issues 1,000 shares of $10 par common stock at $14 per share. When the transaction is recorded, credits are made to a. Common Stock, $14,000 b. Common Stock, $10,000, and Paid-In Capital in Excess of Par—Common Stock, $4,000 c. Common Stock, $4,000, and Paid-In Capital in Excess of Stated Value, $10,000 d. Common Stock, $10,000, and Retained Earnings, $4,000 ANSWER: RATIONALE:

b Total Cash Raised through Issue of Shares = 1,000 × $14 = $14,000 Par Value of Common Stock Issued = Number of Shares Issued × Par Value of Each Share = 1,000 × $10 = $10,000 Paid-In Capital in Excess of Par—Common Stock = $14,000 – $10,000 = $4,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:21 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 90. Nexis Corp. issues 1,000 shares of $15 par value common stock at $22 per share. When the transaction is recorded, credits are made to a. Common Stock, $15,000, and Paid-In Capital in Excess of Par—Common Stock, $7,000 b. Common Stock, $22,000, and Retained Earnings, $15,000 c. Common Stock, $7,000, and Paid-In Capital in Excess of Stated Value, $15,000 d. Common Stock, $22,000 ANSWER: RATIONALE:

a Total Cash Raised through Issue of Shares = 1,000 shares × $22 = $22,000 Par Value of Common Stock Issued = Number of Shares Issued × Par Value of Share = 1,000 × $15 = $15,000 Paid-In Capital in Excess of Par—Common Stock = $22,000 – $15,000 = $7,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:22 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 91. When Wisconsin Corporation was formed on January 1, the corporate charter provided for 100,000 shares of $10 par value common stock. During its first month of operation, the corporation issued 8,500 shares of stock at a price of $16 per share. The entry to record the above transaction would include a a. debit to Cash for $85,000 b. credit to Common Stock for $136,000 c. credit to Paid-In Capital in Excess of Par—Common Stock for $51,000 d. debit to Common Stock for $85,000 ANSWER: RATIONALE:

c Total Cash Raised through Issue of Shares = 8,500 × $16 = $136,000 Par Value of Shares = 8,500 × $10 = $85,000 Paid-In Capital in Excess of Par—Common Stock = $136,000 – $85,000 = $51,000 Debit Cash

136,000

Common Stock Paid-In Capital in Excess of Par—Common Stock POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:03 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 92. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1: Year 2: Year 3:

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the first year. a. $0.50 and $0.10 b. $0 and $0.10 c. $0.50 and $0 d. $2.00 and $0 ANSWER: RATIONALE:

c Total Dividends for Preferred Stock for Year 1 = 20,000 × $100 × 2% = $40,000 The total dividend distributed in Year 1 is given as $10,000. Dividends per Share for Preferred Stock = Total Dividends Distributed in Year 1/Number of Shares of Preferred Stock = $10,000/20,000 = $0.50 Dividends per Share for Common Stock for Year 1 = $0 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:24 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 93. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2-per-share dividend is declared? a. $60,000 b. $20,000 c. $120,000 d. $100,000 ANSWER: RATIONALE:

d Amount of Cash Dividends to Be Paid = Number of Shares Outstanding × Dividends per Share = (60,000 – 10,000) × $2 = 50,000 × $2 = $100,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:04 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 94. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 45,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2-per-share dividend is declared? a. $80,000 b. $10,000 c. $90,000 d. $100,00 ANSWER: RATIONALE:

a Amount of Cash Dividends to Be Paid = Number of Shares Outstanding × Dividends per Share = (45,000 – 5,000) × $2 = 40,000 × $2 = $80,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:05 AM 95. The date on which a cash dividend becomes a binding legal obligation is the a. declaration date b. date of record c. payment date d. last day of the fiscal year ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:38 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 96. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders' equity b. increase total expenses and total liabilities c. increase total assets and stockholders' equity d. decrease total assets and stockholders' equity ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:39 AM 97. Which of the following is the appropriate general journal entry to record the declaration of cash dividends? a. Retained Earnings Cash b. Cash Dividends Payable Cash c. Paid-In Capital Cash Dividends Payable d. Cash Dividends Cash Dividends Payable ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:40 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 98. Texas Inc. has 10,000 shares of 6%, $125 par value cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31. What is the annual dividend on the preferred stock? a. $60 per share b. $75,000 in total c. $10,000 in total d. $0.75 per share ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Annual Dividend on Preferred Stock = $125 × 6% × 10,000 = $75,000 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:06 AM 99. Which of the following is not a prerequisite to paying a cash dividend? a. formal action by the board of directors b. market value in excess of par value per share c. sufficient cash d. sufficient retained earnings ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:46 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 100. The liability for a dividend is recorded on which of the following dates? a. date of record b. date of payment c. last day of the fiscal year d. date of declaration ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 1:47 AM 101. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 2% stock dividend on a date when the market price was $11 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $3,200 b. $6,400 c. $4,800 d. $8,800 ANSWER: RATIONALE:

d Amount Transferred from Retained Earnings Account to Paid-In Capital Accounts = Number of Shares Issued as Stock Dividends × Market Price of Each Share at Time of Issue = 2% × 40,000 shares × $11 = $8,800 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:07 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 102. A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 per share. The effect of the declaration and issuance of the stock dividend is to a. decrease retained earnings, increase common stock, and increase paid-in capital b. increase retained earnings, decrease common stock, and decrease paid-in capital c. increase retained earnings, decrease common stock, and increase paid-in capital d. decrease retained earnings, increase common stock, and decrease paid-in capital ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:07 AM 103. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $12,800 b. $19,200 c. $32,000 d. $48,800 ANSWER: RATIONALE:

b Amount Transferred from Retained Earnings Account to Paid-In Capital Accounts = Number of Shares Issued as Stock Dividends × Market Price of Each Share at Time of Issue = 4% × 40,000 shares × $12 = $19,200 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 104. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the second year. a. $2.25 and $0 b. $2.25 and $0.45 c. $0 and $0.45 d. $2.00 and $0.45 ANSWER: RATIONALE:

a Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000 Year 1 Year 2 Preferred stock dividend to be paid $ 40,000 $ 70,000 ($40,000 + $30,000) Preferred stock dividend paid (10,000) (45,000) Arrears $ 30,000 $ 25,000

Dividends per share: Preferred Stock = $45,000/20,000 = $2.25 Common Stock = $0 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:29 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends

105. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the third year. a. $4.50 and $0.25 b. $3.25 and $0.25 c. $4.50 and $0.90 d. $2.00 and $0.25 ANSWER: RATIONALE:

a Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000 Year 1 Year 2 Preferred stock dividend to be paid $ 40,000 $ 70,000 $ 65,000 ($40,000 + $30,000) ($40,000 + $25 Preferred stock dividend paid

(10,000)

(45,000)

Arrears

$ 30,000

$ 25,000

Common stock dividend to be paid in Year 3 = $90,000 – $65,000 = $25,000 Dividends per share: Preferred Stock = $65,000/20,000 = $3.25 Common Stock = $25,000/100,000 = $0.25 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/22/2017 2:04 AM DATE MODIFIED: 2/22/2017 4:30 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 106. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the second year. a. $25,000 b. $10,000 c. $0 d. $30,000 ANSWER:

a Preferred stock dividend to be paid

Year 1 $ 40,000

Preferred stock dividend paid Arrears

(10,000) $ 30,000

RATIONALE:

Year 2 $ 70,000 ($40,000 + $30,000) (45,000) $ 25,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/22/2017 2:16 AM DATE MODIFIED: 2/22/2017 4:31 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 107. When a stock dividend is declared, which of the following accounts is credited? a. Common Stock b. Dividends Payable c. Stock Dividends Distributable d. Retained Earnings ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 2:26 AM 108. A reduction of par or stated value of stock results from a a. liquidating dividend b. stock split c. stock option d. preferred dividend ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:09 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 109. A corporation has 50,000 shares of $25 par stock outstanding. If the corporation issues a 3-for-1 stock split, the number of shares outstanding after the split will be a. 150,000 shares b. 50,000 shares c. 100,000 shares d. 16,666 shares ANSWER: RATIONALE:

a Number of Shares Outstanding after Split = Current Number of Shares Outstanding × Ratio of Stock Split = 50,000 × 3 = 150,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:32 AM 110. When a corporation completes a 3-for-1 stock split, a. the ownership interest of current stockholders is decreased b. the market price per share of the stock is decreased c. the par value per share is decreased d. the market price per share of the stock and the par value per share are decreased ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 2:45 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 111. A corporation has 50,000 shares of $28 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately a. $7.00 b. $112.00 c. $37.50 d. $600.00 ANSWER: RATIONALE:

c New Market Value of Stock = Current Market Price of Stock/Ratio of Stock Split = $150/4 = $37.50 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:33 AM 112. The primary purpose of a stock split is to a. increase paid-in capital b. reduce the market price of the stock per share c. increase the market price of the stock per share d. increase retained earnings ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 113. Which of the following statements is not true about a 2-for-1 split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price will probably decrease. d. A stockholder with 10 shares before the split owns 20 shares after the split. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 2:53 AM 114. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock after the split will be approximately a. $25 b. $150 c. $5 d. $30 ANSWER: RATIONALE:

d New Market Value of Stock = Current Market Price of Stock/Ratio of Stock Split = $150/5 = $30 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:35 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 115. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the par value of the stock after the split will be a. $5 b. $60 c. $25 d. $24 ANSWER: RATIONALE:

a New Par Value of Stock = Current Par Value of Stock/Ratio of Stock Split = $25/5 = $5 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:37 AM 116. Nevada Corporation has 30,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the number of shares outstanding will be a. 60,000 b. 6,000 c. 150,000 d. 15,000 ANSWER: RATIONALE:

c Number of Shares Outstanding after Stock Split = Current Number of Shares Outstanding × Ratio of Stock Split = 30,000 × 5 = 150,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:10 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 117. Treasury stock shares are a. shares held by the U.S. Treasury Department b. part of the total outstanding shares but not part of the total issued shares of a corporation c. unissued shares that are held by the treasurer of the corporation d. issued shares that have been reacquired by a corporation ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:38 AM 118. On January 1, Vermont Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $20 per share. On February 1, Vermont purchased 3,750 shares of treasury stock for $24 per share and later sold the treasury shares for $21 per share on March 1. The journal entry to record the purchase of the treasury shares on February 1 would include a a. credit to Treasury Stock for $90,000 b. debit to Treasury Stock for $90,000 c. debit to a loss account for $112,500 d. credit to a gain account for $112,500 ANSWER: RATIONALE:

b Value of Shares Purchased = Purchase Price of Each Share × Number of Shares Purchased = $24 × 3,750 = $90,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:11 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 119. Which of the following is not a reason for a corporation to buy back its own stock? a. resale to employees b. bonus to employees c. support the market price of the stock d. increase the shares outstanding ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:41 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 121. The excess of sales price of treasury stock over its cost should be credited to a. Treasury Stock Receivable b. Premium on Capital Stock c. Paid-In Capital from Sale of Treasury Stock d. Income from Sale of Treasury Stock ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 3:25 AM 122. Treasury stock that was purchased for $3,000 is sold for $3,500. As a result of these two transactions combined a. income will be increased by $500 b. stockholders' equity will be increased by $3,500 c. stockholders' equity will be increased by $500 d. stockholders' equity will not change ANSWER: RATIONALE:

c Effect on Stockholders' Equity = Sale Price of Treasury Stock – Purchase Price of Treasury Stock = $3,500 – $3,000 = $500 Increase in Stockholders' Equity = $500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:12 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 123. Treasury stock that had been purchased for $5,600 last month was reissued this month for $8,500. The journal entry to record the reissuance would include a credit to a. Treasury Stock for $8,500 b. Paid-In Capital from Sale of Treasury Stock for $8,500 c. Paid-In Capital in Excess of Par—Common Stock for $2,900 d. Paid-In Capital from Sale of Treasury Stock for $2,900 ANSWER: RATIONALE:

d Effect of Reissuance of Treasury Stock = $8,500 – $5,600 = $2,900 $2,900 will be credited to Paid-In Capital from Sale of Treasury Stock. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:13 AM 124. A corporation purchased 1,000 shares of its own $5 par common stock at $10 and subsequently sold 500 of the shares at $20. What amount of revenue is realized from the sale? a. $0 b. $5,000 c. $2,500 d. $10,000 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:43 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 125. A corporation purchases 10,000 shares of its own $10 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity? a. increase by $100,000 b. increase by $350,000 c. decrease by $100,000 d. decrease by $350,000 ANSWER: RATIONALE:

d Effect on Total Stockholders' Equity = 10,000 × $35 = $350,000 Stockholders' equity will decrease by $350,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:48 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 126. What is the total stockholders' equity based on the following account balances? Common Stock Paid-In Capital in Excess of Par Retained Earnings Treasury Stock

$375,000 90,000 190,000 15,000

a. $670,000 b. $655,000 c. $640,000 d. $565,000 ANSWER: RATIONALE:

c Total Stockholders' Equity = Common Stock + Paid-In Capital in Excess of Par + Retained Earnings – Treasury Stock = $375,000 + $90,000 + $190,000 – $15,000 = $640,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:14 AM

Page 68

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 127. In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be reported? a. Other expense on income statement b. Intangible asset on the balance sheet c. Stockholders' equity on balance sheet d. Other income on income statement ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 3:35 AM 128. Which of the following is not classified as paid-in capital on the balance sheet? a. common stock b. common stock distributable c. excess of issue price over par d. treasury stock ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 3:37 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 129. All of the following are normally found in a corporation's Stockholders' equity section except a. Common Stock b. Paid-In Capital in Excess of Par c. Dividends in Arrears d. Retained Earnings ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:14 AM 130. Which of the following amounts should be disclosed in the Stockholders' equity section of the balance sheet? a. the number of shares of common stock outstanding b. the number of shares of common stock issued c. the number of shares of common stock authorized d. All of these choices ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 131. Significant changes in stockholders' equity are reported on the a. income statement b. retained earnings statement c. statement of stockholders' equity d. statement of cash flows ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:15 AM 132. Retained earnings a. is the same as contributed capital b. cannot have a debit balance c. changes are summarized in the retained earnings statement d. is equal to cash on hand ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 133. Which of the following would appear as a prior period adjustment? a. loss resulting from the sale of fixed assets b. difference between the actual and estimated uncollectible accounts receivable c. error in the computation of depreciation expense in the preceding year d. loss from the restructuring of assets ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:16 AM 134. A restriction/appropriation of retained earnings a. decreases total assets b. increases total retained earnings c. decreases total retained earnings d. has no effect on total retained earnings ANSWER: POINTS: DIFFICULTY:

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 135. Dayton Corporation began the current year with a retained earnings balance of $32,000. During the year, the company corrected an error made in the prior year, which was a failure to record a depreciation expense of $3,000 on equipment. Also, during the current year, the company earned net income of $12,000 and declared cash dividends of $7,000. Compute the year-end retained earnings balance. a. $34,000 b. $37,000 c. $41,000 d. $44,000 ANSWER: RATIONALE:

a Year-End Retained Earnings Balance = Beginning Retained Earnings Balance – Depreciation Expense + Net Income – Cash Dividends = $32,000 – $3,000 + $12,000 – $7,000 = $34,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:18 AM

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 136. What is the total stockholders' equity based on the following data? Common Stock Excess of Issue Price over Par Retained Earnings (deficit)

$360,000 735,000 (56,000)

a. $1,095,000 b. $1,151,000 c. $1,039,000 d. $679,000 ANSWER: RATIONALE:

c Total Stockholders' Equity = Common Stock + Excess of Issue Price over Par – Retained Earnings (deficit) = $360,000 + $735,000 – $56,000 = $1,039,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:18 AM 137. The two main sources of stockholders' equity are a. investments by stockholders and net income retained in the business b. investments by stockholders and dividends paid c. net income retained in the business and dividends paid d. investments by stockholders and purchases of assets ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:47 AM Copyright Cengage Learning. Powered by Cognero.

Page 74

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 138. Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment b. liability c. current asset d. deduction from stockholders' equity ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 4:49 AM 139. Earnings per share a. is the net income per common share b. must be reported by a public company c. helps compare companies of different sizes d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 3:55 AM

Page 75

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 140. Oregon, Inc. reported net income of $105,000. During the current year, the company had 5,000 shares of $100 par, 5% preferred stock and 10,000 shares of $5 par common stock outstanding. Oregon's earnings per share is a. $8.00 b. $18.00 c. $5.08 d. $5.00 ANSWER: RATIONALE:

a Earnings per Share = (Net Income – Preferred Dividends)/Average Number of Common Shares Outstanding = [$105,000 – (5,000 × $100 × 5% )]/10,000 = ($105,000 – $25,000)/10,000 = $80,000/10,000 = $8.00 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:19 AM Matching Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Articles of incorporation b. Limited liability c. Bylaws d. Corporation e. Public corporation f. Board of directors g. Private corporation h. Dividends DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM Copyright Cengage Learning. Powered by Cognero.

Page 76

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends DATE MODIFIED: 2/22/2017 5:29 AM 141. A legal entity, separate from the people who create and operate it ANSWER: d POINTS: 1 142. A company whose shares can be bought and sold in public markets ANSWER: e POINTS: 1 143. The rules and procedures for conducting a corporation's affairs ANSWER: c POINTS: 1 144. A company whose shares are not bought or sold in public markets ANSWER: g POINTS: 1 145. Document that formally creates a corporation ANSWER: a POINTS: 1 146. Creditors cannot pursue stockholders' personal assets to satisfy claims ANSWER: b POINTS: 1 147. Group that meets periodically to establish corporate policies ANSWER: f POINTS: 1 148. Corporate income distributed to stockholders ANSWER: h POINTS: 1 Match each of the following stockholders' equity concepts to the most appropriate term (a–h). a. Authorized shares b. Issued shares c. Outstanding shares d. Par value e. Common stock f. Preferred stock g. Paid-In Capital in Excess of Par h. Transfer agent DIFFICULTY:

Moderate Bloom's: Remembering

Page 77

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:23 AM 149. The account used to record the difference when issue price exceeds par value of stock ANSWER: g POINTS: 1 150. The dollar amount assigned to each share of stock ANSWER: d POINTS: 1 151. The number of shares currently held by stockholders ANSWER: c POINTS: 1 152. A class of stock having first rights to dividends of a corporation ANSWER: f POINTS: 1 153. The maximum number of shares a company can issue to shareholders ANSWER: a POINTS: 1 154. The number of shares sold to stockholders ANSWER: b POINTS: 1 155. A class of stock that provides no preference rights to shareholders ANSWER: e POINTS: 1 156. A financial institution that records and maintains records of another company's stockholders ANSWER: h POINTS: 1 Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Cash dividend b. Date of record c. Stock Dividends Distributable d. Date of declaration Copyright Cengage Learning. Powered by Cognero.

Page 78

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends e. Treasury stock f. Preferred stock g. Date of payment h. Paid-In Capital in Excess of Par DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 5:44 AM 157. Equity account reflecting shares “owed” to stockholders ANSWER: c POINTS: 1 158. Shares of common stock that were issued and then reacquired by a company ANSWER: e POINTS: 1 159. Owners of this class of stock are entitled to receive dividends first ANSWER: f POINTS: 1 160. Cash distribution of a company’s earnings to stockholders ANSWER: a POINTS: 1 161. Account used when shares are issued for an amount greater than par value ANSWER: h POINTS: 1 162. The day of the event that creates a liability to company ANSWER: d POINTS: 1 163. The date that is used to determine the owners of stock who will receive the current dividend ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

Page 79

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 164. The date when dividends are actually distributed to stockholders ANSWER: g POINTS: 1 For the current year ended, ABC had the following transactions: Issued 10,000 shares of $2 par common stock for $12 per share. Issued 3,000 shares of $50 par, 6% preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. Reported net income of $200,000. Declared and paid a total dividend of $40,000. Assume that retained earnings had a beginning balance of $75,000. Match the following amounts to the appropriate term (a–h). a. Treasury stock b. Retained earnings c. Preferred stock d. Excess of issue price over par (preferred) e. Common stock f. Total paid-in capital g. Excess of issue price over par (common) h. Total stockholders' equity RATIONALE:

DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

165. Preferred Stock = Number of Shares of Preferred Stock Issued × Par Value of Preferred Stock = 3,000 × $50 = $150,000 166. Excess of Issue Price over Par (Common) = Excess Price of Common Stock × Number of Shares of Common Stock Issued = ($12 – $2) × 10,000 = $100,000 167. Excess of Issue Price over Par (Preferred) = Excess Price of Preferred Stock × Number of Shares of Preferred Stock Issued = ($70 – $50) × 3,000 = $20 × 3,000 = $60,000 168. Common Stock = Par Value of Common Stock × Number of Shares of Common Stock Issued = $2 × 10,000 = $20,000 169. Retained Earnings = Beginning Retained Earnings + Net Income + Ending Retained Earnings – Cash Dividends = $75,000 + $200,000 – $40,000 = $235,000 170. Total Paid-In Capital = Preferred Stock + Excess of Issue Price over Par (Preferred) + Common Stock + Excess of Issue Price over Par (Common) = $150,000 + $60,000 + $20,000 + $100,000 = $330,000 171. Total Stockholders’ Equity = Total Paid-In Capital + Retained Earnings – Treasury Stock = $330,000 + $235,000 – $15,000 = $550,000 172. Treasury Stock = Number of Common Stock Purchased × Purchase Price of Common Stock = 1,000 × $15 = $15,000 Challenging Bloom's: Applying Matching False

Page 80

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 7:33 PM 165. $150,000 ANSWER: c POINTS: 1 166. $100,000 ANSWER: g POINTS: 1 167. $60,000 ANSWER: d POINTS: 1 168. $20,000 ANSWER: e POINTS: 1 169. $235,000 ANSWER: b POINTS: 1 170. $330,000 ANSWER: f POINTS: 1 171. $550,000 ANSWER: h POINTS: 1 172. $15,000 ANSWER: a POINTS: 1

Page 81

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Subjective Short Answer 173. On April 1, 10,000 shares of $5 par common stock were issued at $22, and on April 7, 5,000 shares of $50 par preferred stock were issued at $104. Journalize the entries for April 1 and 7. ANSWER:

Apr. 1 Cash

220,000

Common Stock

50,000

Paid-In Capital in Excess of Par— Common Stock

170,000

7 Cash

520,000

Preferred Stock

250,000

Paid-In Capital in Excess of Par— Preferred Stock

270,000

POINTS: DIFFICULTY:

Page 82

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 174. On May 10, a company issued for cash 1,500 shares of no-par common stock (with a stated value of $2) at $14, and on May 15, it issued for cash 2,000 shares of $15 par preferred stock at $58. Journalize the entries for May 10 and 15, assuming that the common stock is to be credited with the stated value. ANSWER:

May 10 Cash

21,000

Common Stock

3,000

Paid-In Capital in Excess of Stated Value—Common Stock

18,000

15 Cash

116,000

Preferred Stock

30,000

Paid-In Capital in Excess of Par— Preferred Stock

86,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 6:24 AM 175. On February 1 of the current year, Motor, Inc. issued 700 shares of $2 par common stock to an attorney in return for preparing and filing the articles of incorporation. The value of the services is $9,600. Journalize this transaction. ANSWER:

Feb. 1 Organizational Expenses Common Stock

9,600

Paid-In Capital in Excess of Par— Common Stock

1,400 8,200

POINTS: DIFFICULTY:

Page 83

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 176. On April 10, a company acquired land in exchange for 1,000 shares of $20 par common stock with a current market price of $73. Journalize this transaction. ANSWER:

Apr. 10 Land Common Stock

73,000

Paid-In Capital in Excess of Par— Common Stock

20,000 53,000

POINTS: DIFFICULTY:

Page 84

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 177. On May 1, 10,000 shares of $10 par common stock were issued at $30, and on May 7, 5,000 shares of $50 par preferred stock were issued at $111. Journalize the entries for May 1 and May 7. ANSWER:

May 1 Cash

300,000 100,000

Common Stock Paid-In Capital in Excess of Par—Common Stock

7 Cash

200,000

555,000

Preferred Stock

250,000

Paid-In Capital in Excess of Par—Preferred Stock

305,000

POINTS: DIFFICULTY:

Page 85

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 178. On February 13, Epperson Company issued for cash 75,000 shares of no-par common stock (with a stated value of $125) at $140. On September 9, Epperson issued at par 15,000 shares of 1%, $60 par preferred stock at par for cash. On November 23, Epperson issued for cash 8,000 shares of 1%, $60 par preferred stock at $70. Journalize the entries to record the February 13, September 9, and November 23 transactions. Feb. 13

ANSWER:

Cash (75,000 shares × $140)

10,500,000

Common Stock

9,375,000

Paid-In Capital in Excess of Stated Value

1,125,000

[75,000 shares × ($140 – $125)]. Sept. 9

Cash

900,000

Preferred Stock

900,000

(15,000 shares × $60). Nov. 23

Cash

560,000

Preferred Stock

480,000

Paid-In Capital in Excess of Par

80,000

[8,000 shares × ($70 – $60)]. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 7:13 AM 179. A corporation was organized on January 1 of the current year, with an authorization of 20,000 shares of 4%, $12 par preferred stock, and 100,000 shares of $3 par common stock. The following selected transactions were completed during the first year of operations: Jan.

Issued 15,000 shares of common stock at $23 per share for cash.

Issued 200 shares of common stock to an attorney in payment of legal fees for organizing the corporation. The value of the stock at the time of payment was $25 per share.

Feb. 24

Issued 20,000 shares of common stock in exchange for land, buildings, and equipment with fair market prices of $65,000, $120,000, and $45,000, respectively.

Page 86

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Mar. 15

Issued 2,000 shares of preferred stock at $56 for cash.

Journalize the transactions. ANSWER:

3 Cash Common Stock Paid-In Capital in Excess of Par— Common Stock

345,000

31 Organizational Expenses Common Stock Paid-In Capital in Excess of Par— Common Stock

5,000

Feb. 24 Land Buildings Equipment Common Stock Paid-In Capital in Excess of Par— Common Stock

65,000 120,000 45,000

Mar. 15

112,000

Jan.

Cash

45,000 300,000

600 4,400

60,000 170,000

Preferred Stock

24,000

Paid-In Capital in Excess of Par— Preferred Stock

88,000

POINTS: DIFFICULTY:

Page 87

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 180. On April 10, Maranda Corporation issued for cash 11,000 shares of no-par common stock at $25. On May 5, Maranda issued at par 1,000 shares of 4%, $50 par preferred stock for cash. On May 25, Maranda issued for cash 15,000 shares of 4%, $50 par preferred stock at $55. Journalize the entries to record the April 10, May 5, and May 25 transactions. ANSWER:

Apr. 10 Cash Common Stock (11,000 × $25)

275,000

May 5 Cash Preferred Stock (1,000 × $50)

50,000

25 Cash Preferred Stock Paid-In Capital in Excess of Par [15,000 × ($55 – $50)]

275,000

50,000

825,000 750,000 75,000

POINTS: DIFFICULTY:

Page 88

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 181. Wonder Sales is authorized to issue 100,000 shares of 2%, $100 par preferred stock and 1,000,000 shares of $10 par common stock. Journalize the following transactions: (a) On January 2, Wonder Sales issues 5,000 shares of preferred stock for $110 per share and 65,000 shares of common stock at $10 per share. (b) On January 25, Wonder Sales issues 250 shares of preferred stock to Morton Law Firm for settlement of a $36,000 invoice for incorporation services. (c) On January 31, Wonder Sales issues 500 shares of common stock to Setup Inc. for fixtures that have a fair market value of $8,500. ANSWER:

(a) Jan. 2 Cash Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock Common Stock (b) Jan. 25

1,200,000 500,000 50,000 650,000

Organizational Expense Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock

36,000

Fixtures

8,500

25,000 11,000

Common Stock

5,000

Paid-In Capital in Excess of Par—Common Stock

3,500

POINTS: DIFFICULTY:

Page 89

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 182. Prepare entries to record the following: (a) (b) (c) (d)

Issued 1,000 shares of $10 par common stock at $56 for cash. Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $21,000. Purchased 100 shares of treasury stock at $25. Sold the 100 shares of treasury stock purchased in (c) at $30.

ANSWER:

(a) Cash

56,000

Common Stock

10,000

Paid-In Capital in Excess of Par—Common Stock

46,000

(b) Equipment

21,000

Common Stock

14,000

Paid-In Capital in Excess of Par—Common Stock

7,000

2,500 2,500 3,000 2,500 500

POINTS: DIFFICULTY:

Page 90

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 183. Prepare entries to record the following: (a) (b) (c) (d)

Issued 1,000 shares of $10 par common stock at $59 for cash. Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $60,000. Purchased 100 shares of treasury stock at $32. Sold the 100 shares of treasury stock purchased in (c) at $42.

ANSWER:

(a) Cash

59,000

Common Stock

10,000

Paid-In Capital in Excess of Par—Common Stock

49,000

(b) Equipment

60,000

Common Stock

14,000

Paid-In Capital in Excess of Par—Common Stock

46,000

3,200 3,200 4,200 3,200 1,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 7:40 AM

Page 91

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 184. Prepare entries to record the following: (a) (b) (c) (d)

Issued 1,000 shares of $15 par common stock at $54 for cash. Issued 1,400 shares of no-par common stock in exchange for equipment with a fair market price of $24,000. Purchased 100 shares of treasury stock at $26. Sold 100 shares of treasury stock purchased in (c) at $29.

ANSWER:

(a) Cash

54,000

Common Stock

15,000

Paid-In Capital in Excess of Par—Common Stock

39,000

(b) Equipment Common Stock (c) Treasury Stock Cash (d) Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock

24,000 24,000 2,600 2,600 2,900 2,600 300

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 7:42 AM 185. Carmen Company is a corporation that has issued both preferred and common stock. As of January 1, it had 50,000 shares of 2.75%, $100 par, preferred stock outstanding and 250,000 shares of $10 par common stock outstanding. Journalize the following transactions: (a) On January 31, the board of directors issues a requirement to purchase 5,000 shares of its common stock at market price. The shares are purchased at a market price of $22 per share. (b) On March 15, Carmen declares a dividend on preferred stock of $2.75 per share. The date of record is March 25 and the date of payment is March 31. (c) On December 1, Carmen declares a cash dividend on common stock of $0.12 per share. The date of record is December 15 and the date of payment is December 21. Copyright Cengage Learning. Powered by Cognero.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends (d) On December 27, the board orders that 2,500 shares of the treasury stock purchased in (a) be sold. The sale price is $25 per share. ANSWER:

(a) Jan. 31 Treasury Stock—Common Stock Cash 110,000

110,000

(b) Mar. 15 Cash Dividends—Preferred Stock Cash Dividends Payable 137,500

137,500

No entry required

Cash Dividends Payable Cash

137,500

137,500 (c) Dec. 1 Cash Dividends—Common Stock Cash Dividends Payable 29,400

29,400

Note: While there are 250,000 shares of common stock issued, only 245,000 are outstanding due to the 5,000 shares held in treasury. Dec. 15 No entry required Dec. 21 Cash Dividends Payable Cash 29,400

29,400

(d) Dec. 27 Cash

62,500 Treasury Stock—Common Stock

55,000 (2,500 × $22) Paid-In Capital—Treasury Stock 7,500 (2,500 × $3) POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Copyright Cengage Learning. Powered by Cognero.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends DATE CREATED: DATE MODIFIED:

1/16/2017 4:11 PM 3/3/2017 7:38 PM

186. A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the following: (a) (b) (c) (d)

Purchased 1,000 shares of treasury stock at $12. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. Sold 500 shares of treasury stock at $15. Purchased equipment for $75,000, paying $25,000 in cash and issuing 4,000 shares of common stock for the remaining. Sold 500 shares of treasury stock at $11.

ANSWER:

(a) Treasury Stock Cash (b) Cash

12,000 12,000 7,500

Paid-In Capital from Sale of Treasury Stock [500 shares × ($15 –12)]

1,500

Treasury Stock (500 shares × $12)

6,000

(c) Equipment Cash Common Stock Paid-In Capital in Excess of Par—Common Stock (d) Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock

75,000 25,000 40,000 10,000 5,500 500 6,000

POINTS: DIFFICULTY:

Page 94

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 187. Prepare entries to record the following transactions for Maine Corp.: (a) Issued 2,000 shares of $10 par common stock at $72 for cash. (b) Issued 2,500 shares of common stock in exchange for land with a fair market price of $130,000. (c) Purchased 400 shares of treasury stock at $70. (d) Sold the 400 shares of treasury stock purchased in (c) at $76. ANSWER:

(a) Cash

144,000

Common Stock

20,000

Paid-In Capital in Excess of Par—Common Stock

124,000

(b) Land

130,000

Common Stock

25,000

Paid-In Capital in Excess of Par—Common Stock

105,000

28,000 28,000

30,400 28,000 2,400

POINTS: DIFFICULTY:

1 Bloom's: Applying Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/22/2017 7:47 AM

Page 95

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 188. A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the following: (a) (b) (c) (d)

Purchased 1,500 shares of treasury stock at $16. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. Sold 1,000 shares of treasury stock at $19. Purchased equipment for $80,000, paying $25,000 in cash and issuing 4,000 shares of common stock. Sold 500 shares of treasury stock at $14.

ANSWER:

(a) Treasury Stock Cash (b) Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock (c) Equipment Cash Common Stock

24,000 24,000 19,000 3,000 16,000 80,000 25,000 40,000

Paid-In Capital in Excess of Par—Common Stock (d) Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock

15,000 7,000 1,000 8,000

POINTS: DIFFICULTY:

Page 96

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 189. A company had stock outstanding as follows during each of its first three years of operations: 2,500 shares of 10%, $100 par, cumulative preferred stock and 50,000 shares of $10 par common stock. The amounts distributed as dividends are presented below. Determine the total and per-share dividends for each class of stock for each year by completing the schedule.

Preferred

Common

Year Dividends Total Per Share Total Per Share 1 $10,000 _________ _________ _________ _________ 2 25,000 _________ _________ _________ _________ 3 60,000 _________ _________ _________ _________

ANSWER: Preferred Year 1

Dividends Total Per Share $10,000 $10,000 $ 4.00

25,000

10.00

60,000

40,000

16.00

Common Total None

Per Share None

None $20,000

None $0.40

POINTS: DIFFICULTY:

Page 97

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 190. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for each year.

Amount distributed Preferred dividend (20,000 shares) Common dividend (100,000 shares)

Year 1 $10,000 10,000 $ 0

Year 2 $45,000 45,000 $ 0

Year 3 $90,000 65,000 $25,000

Dividends per share: Preferred stock Common stock

$0.50 $0

$2.25 $0

$3.25 $0.25

$25,000

ANSWER:

Current year preferred dividend in arrears $30,000 POINTS: DIFFICULTY:

Page 98

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 191. The dates of importance in connection with a cash dividend of $50,000 on a corporation’s common stock are January 15, February 15, and March 15. Journalize the entries required on each date. ANSWER:

Jan. 15 Cash Dividends Cash Dividends Payable

50,000 50,000

Feb. 15 No entry required Mar. 15 Cash Dividends Payable Cash

50,000 50,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 6:43 AM

Page 99

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 192. Vincent Corporation has 100,000 shares of $100 par common stock outstanding. On June 30, Vincent Corporation declared a 5% stock dividend to be issued on July 30 to stockholders of record July 15. The market price of the stock was $132 a share on June 30. Journalize the entries required on June 30, July 15, and July 30. ANSWER:

June 30 Stock Dividends (100,000 × 5% × $132) Stock Dividends Distributable (5,000 × $100) Paid-In Capital in Excess of Par—Common Stock

660,000 500,000 160,000

July 15 No entry required July 30 Stock Dividends Distributable Common Stock

500,000 500,000

POINTS: DIFFICULTY:

Page 100

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 193. Sabas Company has 40,000 shares of $100 par, 1% preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$50,000 90,000 130,000

Determine the dividends per share for preferred and common stock for each year. ANSWER:

Amount distributed Preferred dividend (40,000 shares) Common dividend (100,000 shares)

Year 1 $50,000 40,000 $10,000

Dividends per share: Preferred stock $1.00 Common stock $0.10 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/23/2017 5:34 AM DATE MODIFIED: 2/23/2017 6:45 AM

Year 2 $90,000 40,000 $50,000

Year 3 $130,000 40,000 $ 90,000

$1.00 $0.50

$1.00 $0.90

Page 101

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 194. Indicate whether the following actions would (+) increase, (–) decrease, or (0) not affect a company's total assets, liabilities, and stockholders' equity. Stockholders' (a) (b) (c) (d)

Declaring a cash dividend Paying the cash dividend declared in (a) Declaring a stock dividend Issuing stock certificates for the stock dividend declared in (c)

Assets _______ _______ _______

Liabilities _______ _______ _______

Equity _______ _______ _______

_______

ANSWER:

(a) Declaring a cash dividend (b) Paying the cash dividend declared in (a) (c) Declaring a stock dividend (d) Issuing stock certificates for the stock dividend declared in (c)

Stockholders' Assets Liabilities Equity 0 + – – – 0 0 0 0 0

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 7:42 PM 195. The following account balances appear on the balance sheet of Osgood Industries: Common Stock (300,000 shares authorized, $100 par) Paid-In Capital in Excess of Par—Common Stock Retained Earnings

$10,000,000 2,000,000 45,000,000

The board of directors declared a 2% stock dividend when the market price of the stock was $135 per share. Required (1) Journalize the entries to record (a) Declaration of the dividend, capitalizing an amount equal to market value (b) Issuance of the stock certificates Copyright Cengage Learning. Powered by Cognero.

Page 102

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends (2)

(3)

Determine the following amounts before the stock dividend was declared: (a) Total paid-in capital (b) Total retained earnings (c) Total stockholders’ equity Determine the following amounts after the stock dividend was declared and closing entries were recorded at the end of the year: (a) (b) (c)

Total paid-in capital Total retained earnings Total stockholders’ equity

ANSWER:

(1) (a) Stock Dividends Stock Dividends Distributable (2,000 × $100) Paid-In Capital in Excess of Par— Common Stock *[($10,000,000/$100) × $135] × 2% (b) Stock Dividends Distributable Common Stock

270,000* 200,000 70,000

200,000 200,000

(2) (a) $12,000,000 ($10,000,000 + $2,000,000) (b) $45,000,000 (c) $57,000,000 ($12,000,000 + $45,000,000) (3) (a) $12,270,000 ($12,000,000 + $270,000) (b) $44,730,000 ($45,000,000 – $270,000) (c) $57,000,000 ($12,270,000 + $44,730,000) POINTS: DIFFICULTY:

Page 103

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 196. Macy Company has 10,000 shares of 2% cumulative preferred stock of $50 par and 25,000 shares of $75 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$30,000 6,000 80,000

Determine the dividends per share for preferred and common stock for each year. ANSWER:

Amount distributed Preferred dividend (40,000 shares) Common dividend (100,000 shares) *($4,000 + $10,000)

Year 1 $30,000 10,000 $20,000

Dividends per share: Preferred stock $1.00 Common stock $0.80 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/23/2017 6:01 AM DATE MODIFIED: 2/23/2017 6:51 AM

Year 2 $6,000 6,000 $ 0

Year 3 $80,000 14,000* $66,000

$0.60 None

$1.40 $2.64

Page 104

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 197. Solar Company has 600,000 shares of $75 par common stock outstanding. On February 13, Solar declared a 3% stock dividend to be issued on April 30 to stockholders of record on March 14. The market price of the stock was $90 per share on February 13. Journalize the entries required on February 13, March 14, and April 30. Feb. 13 ANSWER:

Stock Dividends (600,000 × 3% × $90) Stock Dividends Distributable (18,000 × $75) Paid-In Capital in Excess of Par— Common Stock ($1,620,000 – $1,350,000)

Mar. 14

No entry required

Apr. 30

Stock Dividends Distributable Common Stock

1,620,000 1,350,000

270,000

1,350,000 1,350,000

POINTS: DIFFICULTY:

Page 105

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 198. The following transaction took place for XYZ Corporation: Nov. 12 Declared a total cash dividend of $45,000 for stockholders of record November 20 payable on December 1. Required (a) Record the journal entries required by these events. (b) Briefly describe the significance of November 20. ANSWER:

(a) Nov. 12

20 Dec. 1

Cash Dividends Cash Dividends Payable

45,000 45,000

No entry required Cash Dividends Payable Cash

45,000 45,000

(b) The stock must be owned on or before November 20 in order to receive this dividend. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 8:45 PM

Page 106

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 199. Sabas Company has 20,000 shares of $100 par, 1% noncumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 15,000 90,000

Determine the dividends per share for preferred and common stock for each year. ANSWER:

Amount distributed Preferred dividend (20,000 shares) Common dividend (100,000 shares)

Year 1 $10,000 10,000 $ 0

Dividends per share: Preferred stock $0.50 Common stock $0 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/23/2017 6:28 AM DATE MODIFIED: 2/23/2017 6:56 AM

Year 2 $15,000 15,000 $ 0

Year 3 $90,000 20,000 $70,000

$0.75 $0

$1.00 $0.70

Page 107

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 200. On January 1, Year 1, a company had the following transactions: Issued 10,000 shares of $2 par common stock for $12 per share. Issued 3,000 shares of $50 par, 6% cumulative preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. The company had the following dividend information available: Year 1 Year 2 Year 3 Year 4

No dividend paid Paid $2,000 total dividends Paid $20,000 total dividends Paid $25,000 total dividends

Using the following format, fill in the correct values for each year: Year 1 Common stock dividend ______ Preferred stock ______ dividend Dividends in arrears ______

Year 2 ______

Year 3 ______

Year 4 ______

______

ANSWER: Year 1

Year 2

Year 3

Year 4

Common stock dividend

None

$11,000

Preferred stock dividend

None

$2,000

$20,000

$14,000

Dividends in arrears $9,000 $16,000 $5,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 6:59 AM

None

Page 108

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 201. Journalize the following selected transactions completed during the current fiscal year: Mar. 24

The board of directors of New Town, Inc. declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 500,000. Declared a dividend of $1.75 per share on the outstanding shares of common stock.

Apr. 5

Paid the dividend declared on March 26.

Nov. 1

Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $25).

Dec. 1

Issued the certificates for the common stock dividend declared on November 1.

ANSWER: Mar. 4 No entry required 26 Cash Dividends Cash Dividends Payable

875,000 875,000

Apr. 5 Cash Dividends Payable Cash

875,000

Nov. 1 Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

625,000

875,000

500,000 125,000

Dec. 1 Stock Dividends Distributable 500,000 Common Stock 500,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 7:04 AM 202. Prepare entries to record the following selected transactions completed during the current fiscal year: Feb.

The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 500,000.

Page 109

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends

May

Purchased 25,000 shares of the company's own stock at $44, recording the treasury stock at cost.

Declared a dividend of $2.50 per share on the outstanding shares of common stock.

Paid the dividend declared on May 1.

Oct. 19

Declared a 2% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $55.)

Nov. 12

Issued the certificates for the common stock dividend declared on October 19.

ANSWER: Feb. 1 No entry required 11 Treasury Stock Cash

1,100,000 1,100,000

May 1 Cash Dividends Cash Dividends Payable

1,187,500

15 Cash Dividends Payable Cash

1,187,500

Oct. 19 Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

522,500

Nov. 12 Stock Dividends Distributable Common Stock

190,000

1,187,500

190,000 332,500

190,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/23/2017 7:57 AM DATE MODIFIED: 3/3/2017 7:44 PM

Page 110

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 203. Journalize the following selected transactions completed during the current fiscal year. Jan.

Feb.

The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 400,000.

Declared a dividend of $1.75 per share on the outstanding shares of common stock.

Paid the dividend declared on January 22.

Sept. 1

Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $30.)

Oct.

Issued the certificates for the common stock dividend declared on September 1.

ANSWER: Jan. 3 No entry required 22

Feb. 8

Sept. 1

Oct. 1

Cash Dividends Cash Dividends Payable

700,000

Cash Dividends Payable Cash

700,000

Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

600,000

Stock Dividends Distributable Common Stock

400,000

700,000

400,000 200,000

400,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 2/23/2017 7:05 AM DATE MODIFIED: 3/17/2017 1:38 PM 204. Selected transactions completed by Breezeway Construction during the current fiscal year are as follows: Copyright Cengage Learning. Powered by Cognero.

Page 111

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Feb.

3 Split the common stock 2-for-1 and reduced the par from $40 to $20 per share. After the split, there were 250,000 common shares outstanding.

Apr. 10 Declared semiannual dividends of $1.50 on 18,000 shares of preferred stock and $0.08 on the common stock to stockholders of record on May 10, payable on June 9. June 9

Paid the cash dividends.

Oct. 10 Declared semiannual dividends of $1.50 on the preferred stock and $0.04 on the common stock (before the stock dividend). In addition, a 2% common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at $36. Dec. 9

Paid the cash dividends and issued the certificates for the common stock dividend.

Required Journalize these transactions. ANSWER:

Feb. 3 No entry required Apr. 10 Cash Dividends Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.08)] = $27,000 + $20,000 = $47,000

47,000*

June 9 Cash Dividends Payable Cash

47,000

Oct. 10 Cash Dividends Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.04)] = $27,000 + $10,000 = $37,000

37,000*

10 Stock Dividends Stock Dividends Distributable (5,000 × $20) Paid-In Capital in Excess of Par—Common Stock **(250,000 shares × 2% × $36) = $180,000

180,000**

Dec. 9 Cash Dividends Payable Cash 9 Stock Dividends Distributable Common Stock Copyright Cengage Learning. Powered by Cognero.

47,000

37,000

100,000 80,000

37,000 37,000 100,000 100,000 Page 112

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 8:22 AM 205. Marcos Company, which had 35,000 shares of common stock outstanding, declared a 4-for-1 stock split. Required (a) What will be the number of shares outstanding after the split? (b) If the common stock had a market price of $280 per share before the stock split, what would be an approximate market price per share after the split? ANSWER:

(a) 140,000 shares (35,000 × 4)

(b) $70 per share ($280/4) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 8:27 AM

Page 113

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 206. A corporation, which had 18,000 shares of common stock outstanding, declared a 3-for-1 stock split. (a) What will be the number of shares outstanding after the split? (b) If the common stock had a market price of $240 per share before the stock split, what would be an approximate market price per share after the split? (c) Journalize the entry to record the stock split. ANSWER: (a)

(b)

(c)

54,000 shares Number of Shares Outstanding after Split= Current Number of Shares Outstanding × Ratio of Stock Split =18,000 shares × 3 = 54,000 $80 per share Approximate Market Price per Share after Split = Current Market Price/Ratio of Stock Split = $240/3 = $80 No entry required

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 8:48 AM

Page 114

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 207. On February 1, Marine Company reacquired 7,500 shares of its common stock at $30 per share. On March 15, Marine sold 4,500 of the reacquired shares at $34 per share. On June 2, Marine sold the remaining shares at $28 per share. Required Journalize the transactions of February 1, March 15, and June 2. ANSWER:

Feb.

Mar. 15

June

Treasury Stock (7,500 × $30) Cash

225,000

Cash (4,500 × $34) Treasury Stock (4,500 × $30) Paid-In Capital from Sale of Treasury Stock [4,500 × ($34 – $30)]

153,000

Cash (3,000 × $28) Paid-In Capital from Sale of Treasury Stock [3,000 × ($30 – $28)] Treasury Stock (3,000 × $30)

84,000

225,000

135,000

18,000

6,000 90,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 9:04 AM

Page 115

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 208. On April 2 a corporation purchased for cash 5,000 shares of its own $10 par common stock at $16 per share. It sold 3,000 of the treasury shares at $19 per share on June 10. The remaining 2,000 shares were sold on November 10 for $12 per share. (a) (b)

Journalize the entries to record the purchase (treasury stock is recorded at cost). Journalize the entries to record the sale of the stock.

ANSWER:

(a) Apr. 2 Treasury Stock (5,000 × $16) Cash (b) June 15 Cash (3,000 × $19) Treasury Stock (3,000 × $16) Paid-In Capital from Sale of Treasury Stock [3,000 × ($16 – $19)]

80,000 80,000

57,000 48,000 9,000

Nov. 10 Cash (2,000 × $12) 24,000 Paid-In Capital from Sale of Treasury Stock [2,000 × ($16 – $12)] 8,000 Treasury Stock (2,000 × $16) 32,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 8:59 AM

Page 116

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 209. On June 5, Belen Corporation reacquired 3,300 shares of its own common stock at $45 per share. On July 15, Belen sold 2,000 of the reacquired shares at $48 per share. On August 30, Belen sold the remaining shares at $42 per share. Journalize the transactions of June 5, July 15, and August 30. ANSWER:

June 5 Treasury Stock (3,300 × $45) Cash

148,500

July 15 Cash (2,000 × $48) Treasury Stock (2,000 × $45) Paid-In Capital from Sale of Treasury Stock [2,000 × ($48 – 45)]

96,000

Aug. 30

54,600

Cash (1,300 × $42) Paid-in Capital from Sale of Treasury Stock [1,300 × ($45 – $42)] Treasury Stock (1,300 × $45)

148,500

90,000 6,000

3,900 58,500

POINTS: DIFFICULTY:

Page 117

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 210. On March 4 of the current year, Barefoot Bay, Inc. reacquired 5,000 shares of its common stock at $89 per share. On August 7, Barefoot Bay sold 3,500 of the reacquired shares at $100 per share. The remaining 1,500 shares were sold at $88 per share on November 29. Required (a) Journalize the transactions of March 4, August 7, and November 29. (b) What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? (c) Why might Barefoot Bay, Inc. have purchased the treasury stock? ANSWER:

(a) Mar. 4

Aug. 7

Nov. 29

Treasury Stock Cash

445,000

Cash Treasury Stock (3,500 × $89) Paid-In Capital from Sale of Treasury Stock

350,000

Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock (1,500 × $89)

132,000

445,000

311,500 38,500

1,500 133,500

(b) $37,000 credit (c) Barefoot Bay may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements. POINTS: DIFFICULTY:

Page 118

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 211. At December 31, Idaho Company had the following ending account balances: Retained Earnings Preferred Stock ($100 par, 7% cumulative, 10,000 authorized, 5,000 issued and outstanding) Treasury Stock Paid-In Capital in Excess of Par—Common Stock Paid-In Capital in Excess of Par—Preferred Stock Common Stock ($5 par value, 500,000 shares authorized, 105,000 issued)

$250,000 500,000 40,000 625,000 50,000 525,000

Prepare the Stockholders' equity section of the balance sheet in good form with all of the required disclosures. ANSWER: Stockholders' Equity Paid-in capital: Preferred 7% stock, $100 par (10,000 shares authorized, 5,000 issued) Excess of issue price over par Common stock, $5 par (500,000 shares authorized, 105,000 shares issued) Excess of issue price over par Total paid-in capital Retained earnings Treasury stock Total stockholders' equity

$ 500,000 50,000 525,000 625,000 $1,700,000 250,000 (40,000) $1,910,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 7:47 PM

Page 119

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 212. Using the following accounts and balances, prepare the Stockholders’ equity section of the balance sheet. Fifty thousand shares of common stock are authorized, and 5,000 shares have been reacquired. Common Stock, $50 par Paid-In Capital in Excess of Par Paid-In Capital from Sale of Treasury Stock Retained Earnings Treasury Stock

$1,250,000 800,000 42,000 4,350,000 155,000

ANSWER: Stockholders’ Equity Paid-in capital: Common stock, $50 par (50,000 shares authorized, 25,000 issued) $1,250,000 Excess of issue price over par 800,000 From sale of treasury stock Total paid-in capital Retained earnings Total Treasury stock (5,000 shares at cost) Total stockholders’ equity POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 7:48 PM

$2,050,000 42,000 $2,092,000 4,350,000 $6,442,000 (155,000) $6,287,000

Page 120

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 213. Big Bluestem Inc. reported the following results for the year ending April 30: $3,750,000 720,000 80,000 220,000

Retained earnings, May 1 Net income Cash dividends declared Stock dividends declared

Prepare a retained earnings statement for the fiscal year ended April 30. ANSWER: Big Bluestem Inc. Retained Earnings Statement For the Year Ended April 30 Retained earnings, May 1 Net income Dividends declared Increase in retained earnings Retained earnings, April 30

$3,750,000 $ 720,000 (300,000) 420,000 $4,170,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 10:36 AM

Page 121

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 214. Using the following information, prepare the Stockholders’ equity section of the balance sheet. Seventy thousand shares of common stock are authorized and 7,000 shares have been reacquired. Common Stock, $75 par Paid-In Capital in Excess of Par Paid-In Capital from Sale of Treasury Stock Retained Earnings Treasury Stock

$4,725,000 679,000 25,200 2,032,800 600,000

ANSWER: Stockholders’ Equity Paid-in capital: Common stock, $75 par (70,000 shares authorized, 63,000 shares issued) Paid-in capital in excess of par Paid-in capital from sale of treasury stock Total paid-in capital Retained earnings Total Treasury stock (7,000 shares at cost) Total stockholders’ equity

$4,725,000 679,000

$5,404,000 25,200 $5,429,200 2,032,800 $7,462,000 (600,000) $6,862,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 3/3/2017 7:49 PM

Page 122

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 215. Firefly, Inc. reported the following results for the year ending July 31: Retained earnings, August 1 Net income Cash dividends declared Stock dividends declared

$875,000 450,000 140,000 60,000

Prepare a retained earnings statement for the fiscal year ended July 31. ANSWER: Firefly, Inc. Retained Earnings Statement For the Year Ended July 31 Retained earnings, August 1 $ 875,000 Net income $ 450,000 Dividends declared (200,000) Increase in retained earnings 250,000 Retained earnings, July 31 $1,125,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 10:49 AM

Page 123

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 216. Torre Company has the following stockholders' equity account balances in stockholders' equity on December 31. Common Stock, $5 par (60,000 shares issued) Paid-In Capital in Excess of Par—Common Stock Preferred Stock, $100 par (5,000 shares issued) Paid-In Capital in Excess of Par—Preferred Stock Retained Earnings Treasury Stock (cost, $12 per share)

$300,000 600,000 500,000 100,000 200,000 60,000

(a) (b) (c) (d) (e) (f)

How many shares of treasury stock are owned? What was the average market price per share at which common stock was issued? What was the average market price per share at which preferred stock was issued? What is the total value of the paid-in capital portion of stockholders' equity? What is the total value of stockholders' equity? How many shares of common stock are outstanding? If net income for the year was $75,000 and a preferred stock dividend of $20,000 was paid, what (g) was the beginning value of retained earnings? How much is earnings per share for the year? ANSWER:

(a) (b) (c) (d) (e) (f) (g)

5,000 shares ($60,000/12) $15 per share ($900,000/60,000) $120 per share ($600,000/5,000) $1,500,000 paid-in capital ($300,000 + $600,000 + $500,000 + $100,000) $1,640,000 total stockholders' equity ($1,500,000 + $200,000 – $60,000) 55,000 shares of common stock outstanding (60,000 – 5,000 shares of treasury stock) $145,000 beginning retained earnings ($200,000 + $20,000 – $75,000) $1 earnings per share [($75,000 – $20,000)/55,000]

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 11:03 AM

Page 124

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 217. A company had the following stockholders' equity information available at year-end: Issued 11,000 shares of $2 par common stock for $12 per share. Issued 5,000 shares of $50 par, 6% preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. Reported net income of $200,000. Declared and paid the preferred stock dividend. Calculate the earnings per share for the current year. ANSWER: POINTS: DIFFICULTY:

($200,000 – $15,000)/10,000 common shares = $18.50 EPS 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:11 PM DATE MODIFIED: 2/23/2017 10:37 AM

Page 125

Chapter 14 - Long-Term Liabilities: Bonds and Notes True / False 1. A bond is simply a form of an interest-bearing note. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 2. Bondholders are creditors of the issuing corporation. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 14 - Long-Term Liabilities: Bonds and Notes 3. Bondholders' claims on the assets of the corporation rank ahead of stockholders' claims. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 4. A bond is usually divided into a number of individual bonds of $500 each. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 14 - Long-Term Liabilities: Bonds and Notes 5. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a convertible bond. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 6. The prices of bonds are quoted as a percentage of the bonds' market value. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 14 - Long-Term Liabilities: Bonds and Notes 7. The face value of a term bond is payable at a single specific date in the future. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 8. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 14 - Long-Term Liabilities: Bonds and Notes 9. The market rate of interest is affected by a variety of factors, including investors' assessment of current economic conditions. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 10. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 14 - Long-Term Liabilities: Bonds and Notes 11. Bonds are sold at face value when the contract rate is equal to the market rate of interest. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 12. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 14 - Long-Term Liabilities: Bonds and Notes 13. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 14. The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 14 - Long-Term Liabilities: Bonds and Notes 15. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the interest method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 16. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 14 - Long-Term Liabilities: Bonds and Notes 17. If the straight-line method of amortization of discount on bonds payable is used, the amount of yearly interest expense will increase as the bonds approach maturity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 18. There are two methods of amortizing a bond discount or premium: the straight-line method and the double-decliningbalance method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 14 - Long-Term Liabilities: Bonds and Notes 19. The effective interest rate method of amortizing a bond discount or premium is the preferred method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 20. The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 14 - Long-Term Liabilities: Bonds and Notes 21. The amortization of a premium on bonds payable decreases bond interest expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 22. If the amount of a bond premium on an issued 11%, four-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416. a. True b. False ANSWER: RATIONALE:

False Semiannual Straight-Line Amortization of Premium = $12,928 ÷ (4 × 2) = $12,928 ÷ 8 = $1,616 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:13 AM

Page 11

Chapter 14 - Long-Term Liabilities: Bonds and Notes 23. If the amount of a bond premium on an issued 11%, four-year, $100,000 bond is $12,928, the annual interest expense is $5,500. a. True b. False ANSWER: RATIONALE:

False Amount of Interest Payment = $100,000 × 11% = $11,000 Annual Premium Amortization = $12,928 ÷ 4 = $3,232 Annual Interest Expense = $11,000 – $3,232 = $7,768 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:14 AM 24. To determine the six-month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM

Page 12

Chapter 14 - Long-Term Liabilities: Bonds and Notes 25. Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every six months. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Interest Payment Every 6 Months = $20,000 × 12% × 1/2 year = $1,200 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:15 AM 26. Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 14 - Long-Term Liabilities: Bonds and Notes 27. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 28. Both callable and noncallable bonds can be purchased by the issuing corporation in the open market. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 14 - Long-Term Liabilities: Bonds and Notes 29. There is a loss on redemption of bonds when bonds are redeemed above carrying value. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 30. When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 15

Chapter 14 - Long-Term Liabilities: Bonds and Notes 31. A corporation often issues callable bonds to protect itself against significant declines in future interest rates. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 32. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 14 - Long-Term Liabilities: Bonds and Notes 33. Only callable bonds can be purchased by the issuing corporation before maturity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 34. Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 14 - Long-Term Liabilities: Bonds and Notes 35. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM 36. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of bonds is $10,000. a. True b. False ANSWER: RATIONALE:

True Gain on Redemption of Bonds = Balance of Bonds Payable – Redemption Value of Bonds – Unamortized Discount = $1,000,000 – ($1,000,000 × 98%) – $10,000 = $1,000,000 – $980,000 – $10,000 = $10,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:25 PM

Page 18

Chapter 14 - Long-Term Liabilities: Bonds and Notes 37. Gains and losses on the redemption of bonds are reported as Other income or Other expense on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:17 AM 38. Discount on Bonds Payable is a contra liability account. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 19

Chapter 14 - Long-Term Liabilities: Bonds and Notes 39. When there are material differences between the results of using the straight-line method and using the effective interest rate method of amortization, the effective interest rate method should be used. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 40. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 20

Chapter 14 - Long-Term Liabilities: Bonds and Notes 41. The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 42. Bonds payable should be reported on the balance sheet at face value plus or minus any unamortized premium or discount. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 14 - Long-Term Liabilities: Bonds and Notes 43. The balance in a bond discount account should be reported on the balance sheet as a deduction from the related bonds payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 44. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 22

Chapter 14 - Long-Term Liabilities: Bonds and Notes 45. The higher the times interest earned ratio, the better the creditors’ protection. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:19 AM 46. The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:20 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 47. The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 48. An equal stream of periodic payments is called an annuity. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 49. The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 50. The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 51. The present value of an annuity is the sum of the present values of each cash flow. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 52. The present value of $5,000 to be received in four years at a market rate of interest of 6% compounded annually is $3,636.30. a. True b. False ANSWER: RATIONALE:

False Present Value = $5,000 × Present Value Factor for $1 Discounted at 6% for 4 Periods = $5,000 × 0.79209 = $3,960.45 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:21 AM

Page 26

Chapter 14 - Long-Term Liabilities: Bonds and Notes 53. One reason a dollar today is worth more than a dollar one year from today is the time value of money. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:22 AM 54. If $500,000 of 10-year bonds with interest payable semiannually are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%. a. True b. False ANSWER: RATIONALE:

False When the market rate is greater than the contract rate, bonds sell for less than their face value. Since the bonds are sold for less than face value of $500,000, the market rate will be greater than contract rate. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:22 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 55. When the effective interest rate method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the given period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 56. The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 28

Chapter 14 - Long-Term Liabilities: Bonds and Notes Multiple Choice 57. One potential advantage of financing corporations through the use of bonds rather than common stock is a. the interest on bonds must be paid when due b. the corporation must pay the bonds at maturity c. the interest expense is deductible for tax purposes by the corporation d. a higher earnings per share is guaranteed for existing common shareholders ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 58. Which of the following is not an advantage of issuing bonds instead of common stock? a. Tax savings result. b. Income to common shareholders may increase. c. Earnings per share on common stock may be lower. d. Stockholder control is not affected. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:24 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 59. A bond indenture is a. a contract between the corporation issuing the bonds and the underwriters selling the bonds b. the amount due at the maturity date of the bonds c. a contract between the corporation issuing the bonds and the bondholders d. the amount for which the corporation can buy back the bonds prior to the maturity date ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 60. When the corporation issuing the bonds has the right to redeem the bonds prior to maturity, the bonds are a. convertible bonds b. unsecured bonds c. debenture bonds d. callable bonds ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:25 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 61. When the maturities of a bond issue are spread over several dates, the bonds are called a. serial bonds b. bearer bonds c. debenture bonds d. term bonds ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 62. The market interest rate related to a bond is also called the a. stated interest rate b. effective interest rate c. contract interest rate d. straight-line rate ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 63. If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be a. equal to $500,000 b. greater than $500,000 c. less than $500,000 d. greater than or less than $500,000, depending on the maturity date of the bonds ANSWER: RATIONALE:

c If the market rate is greater than the contract rate, the bonds will sell for less than their face value. Thus, the price of the bond will be less than $500,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 64. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at a. a premium b. their face value c. their maturity value d. a discount ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 65. The interest rate specified in the bond indenture is called the a. discount rate b. contract rate c. market rate d. effective rate ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 66. A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. trading on the equity b. a convertible bond c. a bond debenture d. a bond indenture ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:26 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 67. Bonds that are subject to retirement prior to maturity at the option of the issuer are called a. debentures b. callable bonds c. early retirement bonds d. options ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 68. On January 1 of the current year, Barton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31, and the maturity date is December 31, five years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 is a. $10,900 b. $18,200 c. $21,800 d. $29,000 ANSWER: RATIONALE:

c Bond Interest Expense = {(Face Value of Bonds × 10% × 1/2 year) + [Discount on Issue ÷ (5 years × 2)]} × 2 = {($200,000 × 10% × 1/2 year) + [($200,000 – $191,000)/(5 × 2)]} × 2 = ($10,000 + $900) × 2 = $21,800

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:26 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 69. If $1,000,000 of 8% bonds are issued at 102 3/4, the amount of cash received from the sale is a. $1,080,000 b. $972,500 c. $1,000,000 d. $1,027,500 ANSWER: RATIONALE:

d Amount of Cash Received from Sale of Bonds = Face Value of Bond × Bond Quote = $1,000,000 × 102.75/100 = $1,027,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 70. If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is a. $2,060,000 b. $2,000,000 c. $2,100,000 d. $1,940,000 ANSWER: RATIONALE:

d Amount of Cash Received from Sale of Bonds = Face Value of Bonds × Bond Quote = $2,000,000 × 0.97 = $1,940,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 71. Selling the bonds at a premium has the effect of a. raising the effective interest rate above the stated interest rate b. attracting investors that are willing to pay a lower rate of interest than on similar bonds c. causing the interest expense to be higher than the bond interest paid d. causing the interest expense to be lower than the bond interest paid ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 72. If bonds are issued at a discount, it means that the a. bondholder will receive effectively less interest than the contractual rate of interest b. market interest rate is lower than the contractual interest rate c. market interest rate is higher than the contractual interest rate d. financial strength of the issuer is suspect ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 73. Levi Company issued $200,000 of 12% bonds on January 1 at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1 and mature in five years on January 1. The total interest expense related to these bonds for the current year ending on December 31 is a. $2,000 b. $6,000 c. $18,000 d. $24,000 ANSWER: RATIONALE:

d Total Interest Expense = (Face Value of Bonds × 12% × 1/2 year) × 2 = ($200,000 × 12% × 1/2 year) × 2 = $24,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:29 AM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 74. A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. b. The amount of annual interest expense gradually decreases over the life of the bonds. c. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity. d. The bonds will be issued at a premium. ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:31 AM 75. If the straight-line method of amortization of bond premium or discount is used, which of the following statements is true? a. Annual interest expense will increase over the life of the bonds with the amortization of bond premium. b. Annual interest expense will remain the same over the life of the bonds with the amortization of bond discount. c. Annual interest expense will decrease over the life of the bonds with the amortization of bond discount. d. Annual interest expense will increase over the life of the bonds with the amortization of bond discount. ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 76. Basil Corporation issues for cash $1,000,000 of 8%, 10-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The carrying amount increases from its amount at issuance date to $1,000,000 at maturity. b. The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. c. The amount of annual interest paid to bondholders increases over the 10-year life of the bonds. d. The amount of annual interest expense decreases as the bonds approach maturity. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 77. Dylan Corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest paid to bondholders remains the same over the life of the bonds. b. The amount of annual interest expense decreases as the bonds approach maturity. c. The amount of annual interest paid to bondholders increases over the 15-year life of the bonds. d. The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity. ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 78. The entry to record the amortization of a premium on bonds payable on an interest payment date would be a. a debit to Premium on Bonds Payable and a credit to Interest Revenue b. a debit to Interest Expense and a credit to Premium on Bond Payable c. a debit to Interest Expense and Premium on Bonds Payable and a credit to Cash d. a debit to Bonds Payable and a credit to Interest Expense ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 11:31 AM 79. The adjusting entry to record the amortization of a discount on bonds payable is a. debit Discount on Bonds Payable, credit Interest Expense b. debit Interest Expense, credit Discount on Bonds Payable c. debit Interest Expense, credit Cash d. debit Bonds Payable, credit Interest Expense ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 80. The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the same is to a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 81. The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 82. The journal entry a company records for the issuance of bonds when the contract rate is less than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 83. The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is a. debit Interest Expense, credit Cash and Discount on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Discount on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 84. The journal entry a company records for the payment of interest, interest expense, and amortization of bond premium is a. debit Interest Expense, credit Cash and Premium on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Premium on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 85. On January 1, Elias Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is a. $5,000 b. $5,200 c. $5,800 d. $5,400 ANSWER: RATIONALE:

d Bond Interest Expense = {(Face Value of Bonds × 10% × 1/2 year) + [Discount on Issue ÷ (10 years × 2)]} × 2 = {($50,000 × 10% × 1/2 year) + [($50,000 – $46,000)/(10 years × 2)]} × 2 = $5,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:28 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 86. If Eddie Industries issues $1,500,000 of 8% bonds at 105, the amount of cash received from the sale is a. $1,425,000 b. $1,080,000 c. $1,000,000 d. $1,575,000 ANSWER: RATIONALE:

d Amount of Cash Received from Sale of Bonds = Face Value of Bonds × Bond Quote = $1,500,000 × 1.05 = $1,575,000 POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:30 PM 87. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium b. at face value c. at a discount d. only after the stated rate of interest is increased ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 88. The interest expense recorded on an interest payment date is increased a. only if the market rate of interest is less than the stated rate of interest on that date b. by the amortization of premium on bonds payable c. by the amortization of discount on bonds payable d. only if the bonds were sold at face value ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 89. On January 1, $2,000,000, five-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is a. $8,000 b. $2,000 c. $4,000 d. $10,000 ANSWER: RATIONALE:

c Semiannual Discount Amortization Amount = (Face Value – Issue Price)/(5 × 2) = ($2,000,000 – $1,960,000)/10 = $4,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:31 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 90. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a. less than face value b. equal to the face value c. greater than face value d. The answer cannot be determined from the information given. ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:33 PM 91. Franklin Corporation issues $50,000, 10%, five-year bonds on January 1 for $52,100. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is a. $10,290 b. $2,710 c. $2,500 d. $2,290 ANSWER: RATIONALE:

d Bond Interest Expense to Be Recognized on July 1 = {(Face Value of Bonds × 10% × 1/2 year) – [(Bond Realization – Face Value) ÷ (5 years × 2)]} × 2 = {($50,000 × 10% × 1/2 year) – [($52,100 – $50,000)/(5 years × 2)]} = $2,500 – $210 = $2,290 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:35 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 92. If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest b. lower than the market rate of interest c. too low to attract investors d. adjusted to a higher rate of interest ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM 93. Freeman Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1 at 96. The journal entry to record the issuance will show a a. debit to Cash for $2,000,000 b. credit to Discount on Bonds Payable for $80,000 c. credit to Bonds Payable for $1,920,000 d. debit to Cash for $1,920,000 ANSWER: RATIONALE:

d Cash Received on Issue of Bonds by Freeman Corporation = Face Value of Each Bond × Number of Bonds × Bond Quote = $1,000 × 2,000 × 0.96 = $1,920,000 The journal entry to record the issuance will show a debit to Cash for $1,920,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:36 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 94. Glenn Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 96. The journal entry to record the issuance will show a a. debit to Discount on Bonds Payable for $80,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $1,920,000 d. credit to Cash for $1,920,000 ANSWER: RATIONALE:

a Discount on Bonds Payable = Face Value of Bond – Cash Received from Issuance of Bonds = ($2,000 × 1,000) – ($2,000 × 1,000 × 0.96) = $2,000,000 – $1,920,000 = $80,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:38 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 95. Hayden Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 92. The journal entry to record the issuance will show a a. credit to Discount on Bonds Payable for $160,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $2,000,000 d. credit to Cash for $1,840,000 ANSWER: RATIONALE:

c Credit to Bonds Payable = Face Value of Bond × Number of Bonds = $2,000 × 1,000 = $2,000,000 The journal entry to record the issuance will show a credit to Bonds Payable for $2,000,000. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/4/2017 1:39 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 96. Bonds with a face amount of $1,000,000 are sold at 106. The journal entry to record the issuance is a. Cash 1,000,000 Premium on Bonds Payable 60,000 Bonds Payable 1,060,000 b. Cash 1,060,000 Premium on Bonds Payable 60,000 Bonds Payable 1,000,000 c. Cash 1,060,000 Discount on Bonds Payable 60,000 Bonds Payable 1,000,000 d. Cash 1,060,000 Bonds Payable 1,060,000 ANSWER: RATIONALE:

b Premium on Issue of Bonds = Cash Received from Issuance of Bonds – Face Value of Bonds = ($1,000,000 × 1.06) – $1,000,000 = $60,000 The journal entry to record the issuance is Cash

1,060,000 Premium on Bonds Payable Bonds Payable

60,000 1,000,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:12 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 97. Bonds with a face amount of $1,000,000 are sold at 98. The entry to record the issuance is a. Cash 1,000,000 Premium on Bonds Payable 20,000 Bonds Payable 980,000 b. Cash 980,000 Premium on Bonds Payable 20,000 Bonds Payable 1,000,000 c. Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000 d. Cash 980,000 Bonds Payable 980,000 ANSWER: RATIONALE:

c Discount on Bonds Payable = Face Value of Bonds – Cash Received from Issuance of Bonds = $1,000,000 – ($1,000,000 × 0.98) = $20,000 The journal entry to record the issuance is Cash Discount on Bonds Payable Bonds Payable

980,000 20,000 1,000,000

POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 98. If bonds payable are not callable, the issuing corporation a. can exchange them for common stock b. can repurchase them in the open market c. must get special permission from the SEC to repurchase them d. is more likely to repurchase them if the interest rates increase ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 99. When callable bonds are redeemed below carrying value, a. Gain on Redemption of Bonds is credited b. Loss on Redemption of Bonds is debited c. Retained Earnings is credited d. Retained Earnings is debited ANSWER: POINTS: DIFFICULTY:

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 100. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption? a. $10,000 loss b. $25,000 loss c. $25,000 gain d. $15,000 gain ANSWER: RATIONALE:

d Gain on Redemption of Bonds = Balance of Bonds Payable – Redemption Value of Bonds – Balance of Discount on Bonds Payable = $1,000,000 – ($1,000,000 × 0.975) – $10,000 = $1,000,000 – $975,000 – $10,000 = $15,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 101. Bonds Payable has a balance of $900,000, and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption? a. $1,200 loss b. $1,200 gain c. $17,000 loss d. $17,000 gain ANSWER: RATIONALE:

c Loss on Redemption = Redemption Value of Bonds – Balance of Bonds Payable – Balance of Premium on Bonds Payable = ($900,000 × 1.03) – $900,000 – $10,000 = $927,000 – $900,000 – $10,000 = $17,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 1:48 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 102. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $292,000. The entry to record the redemption would include a a. loss on bond redemption of $4,000 b. gain on bond redemption of $4,000 c. gain on bond redemption of $2,000 d. loss on bond redemption of $2,000 ANSWER: RATIONALE:

d Loss on Bond Redemption = Redemption Value of Bonds – Carrying Value of Bond = ($300,000 × 0.98) – $292,000 = $2,000 The entry to record the redemption would include a loss on bond redemption of $2,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 103. A $300,000 bond was redeemed at 104 when the carrying value of the bond was $316,000. The entry to record the redemption would include a a. loss on bond redemption of $3,000 b. gain on bond redemption of $3,000 c. gain on bond redemption of $4,000 d. loss on bond redemption of $4,000 ANSWER: RATIONALE:

c Gain on Bond Redemption = Carrying Value of Bond – Redemption Value of Bonds = $316,000 – ($300,000 × 1.04) = $4,000 The entry to record the redemption would include a gain on bond redemption of $4,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 104. Bonds Payable has a balance of $1,000,000, and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption? a. $500 loss b. $15,500 loss c. $15,500 gain d. $500 gain ANSWER: RATIONALE:

a Loss on Redemption = Redemption Value of Bonds + Balance of Discount on Bonds Payable – Balance of Bonds Payable = ($1,000,000 × 0.985) + $15,500 – $1,000,000 = $985,000 + $15,500 – $1,000,000 = $500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 1:52 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 105. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal entry to record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to a. Interest Expense for $2,500 b. Premium on Bonds Payable for $2,500 c. Interest Expense for $5,000 d. Premium on Bonds Payable for $5,000 ANSWER: RATIONALE:

d Amortization of Premium by Straight-Line Method for Year = [Premium Amount/(10 years × 2)] × 2 = [($1,050,000 – $1,000,000)/20] × 2 = ($50,000/20) × 2 = $5,000 The journal entry to record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to Premium on Bonds Payable for $5,000. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 106. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If Lisbon uses the straight-line method for amortizing the premium, the journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to a. Interest Payable for $30,000 b. Interest Expense for $32,500 c. Cash for $70,000 d. Premium on Bonds Payable for $5,500 ANSWER: RATIONALE:

b Interest Expense = Interest – Amortization of Premium on Bonds Payable = [$1,000,000 × (7% ÷ 2)] – [($1,050,000 – $1,000,000)/(10 × 2)] = $35,000 – $2,500 = $32,500 The journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to Interest Expense for $32,500. POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 107. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption? a. $3,000 loss b. $3,000 gain c. $7,000 loss d. $7,000 gain ANSWER: RATIONALE:

a Loss on Redemption of Bonds = Redemption Value of Bonds – Balance of Bonds Payable – Balance of Premium on Bonds Payable = ($1,000,000 × 1.01) – $1,000,000 – $7,000 = $3,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 108. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to a. face value b. face value plus the unamortized discount c. face value minus the unamortized premium d. face value plus the unamortized premium ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 109. The balance in Discount on Bonds Payable a. should be reported on the balance sheet as an asset because it has a debit balance b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable to determine the carrying amount of the bonds d. would be subtracted from the related bonds payable on the balance sheet ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 110. The balance in Premium on Bonds Payable a. should be reported on the balance sheet as a deduction from the related bonds payable b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable on the balance sheet d. should be reported in the Paid-in capital section of the balance sheet ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 1:56 PM 111. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will a. equal the interest rate on the note times the carrying amount of the note at the beginning of the period b. remain constant over the term of the note c. equal the interest rate on the note times the face amount d. increase over the term of the note ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 112. On the first day of the fiscal year, Hawthorne Company obtained an $88,000, seven-year, 5% installment note from Sea Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal entry Hawthorne would record to make the first annual payment due on the note would include a a. debit to Cash for $15,208 b. credit to Notes Payable for $10,808 c. debit to Interest Expense for $4,400 d. debit to Notes Payable for $15,208 ANSWER: RATIONALE:

c The journal entry Hawthorne would record to make the first annual payment due on the note would include a debit to Interest Expense for $4,400. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 1:56 PM

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 113. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the payment of the first annual amount due on the note would include a a. debit to Cash for $11,942 b. credit to Interest Payable for $11,550 c. debit to Notes Payable for $11,942 d. debit to Interest Expense for $23,492 ANSWER: RATIONALE:

c The journal entry to record the payment of the first annual amount due on the note would include a debit to Notes Payable for $11,942 for the principal portion of the repayment. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 65

Chapter 14 - Long-Term Liabilities: Bonds and Notes 114. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the issuance of the installment note for cash on January 1 would include a a. debit to Interest Expense for $11,550 b. credit to Interest Payable for $11,550 c. credit to Notes Payable for $165,000 d. debit to Notes Payable for $165,000 ANSWER: RATIONALE:

c The journal entry to record the issuance of the installment note for cash on January 1 would include a credit to Notes Payable for $165,000 for the principal amount of the note. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 66

Chapter 14 - Long-Term Liabilities: Bonds and Notes 115. On January 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the current year. The December 31, Year 1, carrying amount in the amortization table for this installment note will be equal to a. $27,635 b. $40,201 c. $36,821 d. $48,620 ANSWER:

b A

RATIONALE: For the Year Ending

C D E Interest Expense Note Decrease in December 31 January 1 (6.50% of January Payment Notes Carrying Carrying 1 (cash Payable Amount (A – Amount Note Carrying paid) (B – C) D) Amount)

December $52,000 31, Year 1

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 2:01 PM

Page 67

Chapter 14 - Long-Term Liabilities: Bonds and Notes 116. On January 1, Year 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 2 carrying amount in the amortization table for this installment note will be equal to a. $26,000 b. $27,635 c. $21,642 d. $28,402 ANSWER:

b A

RATIONALE: For the Year Ending

B C D E Note Interest Expense Decrease in December 31 January 1 Payment (6.5% of January 1 Notes Carrying Carrying (cash Note Carrying Payable Amount (A – Amount paid) Amount) (B – C) D)

December $52,000 31, Year 1

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

December 31, Year 2

15,179

2,613 (6.5% × $40,201)

12,566

27,635

40,201

POINTS: DIFFICULTY:

Page 68

Chapter 14 - Long-Term Liabilities: Bonds and Notes 117. On January 1, Year 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3 carrying amount in the amortization table for this installment note will be equal to a. $0 b. $13,000 c. $14,252 d. $16,603 ANSWER:

c A

RATIONALE: For the Year Ending

B C D E Note Interest Expense Decrease in December 31 January 1 Payment (6.5% of January 1 Notes Carrying Carrying (cash Note Carrying Payable Amount (A – Amount paid) Amount) (B – C) D)

December $52,000 31, Year 1

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

December 31, Year 2

40,201

15,179

2,613 (6.5% × $40,201)

12,566

27,635

December 31, Year 3

27,635

15,179

1,796 (6.5% × $27,635)

13,383

14,252

POINTS: DIFFICULTY:

Page 69

Chapter 14 - Long-Term Liabilities: Bonds and Notes 118. An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $22,315 beginning December 31, of the first year, for each of the next five years. After the final payment, the carrying amount on the note will be a. $1,263 b. $21,053 c. $22,315 d. $0 ANSWER: RATIONALE:

d A

E December January Note Interest Expense Decrease 31 For the 1 Payment (6% of January 1 in Notes Carrying Year Carrying (cash Note Carrying Payable Amount (A Ending Amount paid) Amount) (B – C) – D) December $94,000 31, Year 1

$22,315

$5,640 (6% × $94,000)

$16,675

$77,325

December 31, Year 2

77,325

22,315

4,640 (6% × $77,325)

17,676*

59,650

December 31, Year 3

59,650

22,315

3,579 (6% × $59,650)

18,736

40,913*

December 31, Year 4

40,913

22,315

2,455 (6% × $40,913)

19,860

21,053

December 31, Year 5

21,053

22,315

1,262 (6% × $21,053)

21,053

*Differences due to rounding POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:35 AM

Page 70

Chapter 14 - Long-Term Liabilities: Bonds and Notes 119. Any unamortized premium should be reported on the balance sheet of the issuing corporation as a. a direct deduction from the face amount of the bonds in the Liabilities section b. paid-in capital c. a direct deduction from retained earnings d. an addition to the face amount of the bonds in the Liabilities section ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 120. The balance in Discount on Bonds Payable that is applicable to bonds due in three years would be reported on the balance sheet in the section entitled a. Investments b. Long-term liabilities c. Current assets d. Intangible assets ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 71

Chapter 14 - Long-Term Liabilities: Bonds and Notes 121. Balance sheet and income statement data indicate the following: Bonds payable, 6% (due in 15 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,200,000 200,000 1,000,000 320,000 80,000 60,000 16,000

Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.00 b. 5.44 c. 4.00 d. 4.33 ANSWER: RATIONALE:

b Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$320,000 + ($1,200,000 × 6%)]/($1,200,000 × 6%) = 5.44 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 72

Chapter 14 - Long-Term Liabilities: Bonds and Notes 122. Debtors are interested in the times interest earned ratio because they want to a. know what rate of interest the corporation is paying b. have adequate protection against a potential drop in earnings jeopardizing their interest payments c. be sure their debt is backed by collateral d. know the tax effect of lending to a corporation ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 123. The times interest earned ratio is computed as a. (Income Before Income Taxes + Interest Expense) ÷ Interest Expense b. (Income Before Income Taxes – Interest Expense) ÷ Interest Expense c. Income Before Income Taxes ÷ Interest Expense d. (Income Before Income Taxes + Interest Expense) ÷ Interest Revenue ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 73

Chapter 14 - Long-Term Liabilities: Bonds and Notes 124. Balance sheet and income statement data indicate the following: Bonds payable, 6% (this is Year 4 of 20 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,200,000 200,000 1,000,000 340,000 80,000 60,000 16,000

Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.72 b. 6.83 c. 4.72 d. 4.83 ANSWER: RATIONALE:

a Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$340,000 + ($1,200,000 × 6%)]/($1,200,000 × 6%) = 5.72 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 74

Chapter 14 - Long-Term Liabilities: Bonds and Notes 125. The present value of $40,000 to be received in two years, at 12% compounded annually, is (rounded to nearest dollar) a. $31,888 b. $48,112 c. $8,112 d. $40,000 ANSWER: RATIONALE:

a Present Value = $40,000 × Present Value Factor (of $1 to be received in two years, at 12% compounded annually) = $40,000 × 0.79719 = $31,888 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 75

Chapter 14 - Long-Term Liabilities: Bonds and Notes 126. A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received for the bonds will be a. present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years b. present value of 30 annual interest payments of $720,000 c. present value of 30 annual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years d. present value of $9,000,000 to be repaid in 30 years, less present value of 60 semiannual interest payments of $360,000 ANSWER: RATIONALE:

a Semiannual Interest Payment = $9,000,000 × (8% ÷ 2) = $360,000 The amount received for the bonds will be present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 76

Chapter 14 - Long-Term Liabilities: Bonds and Notes 127. The present value of $60,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar) a. $56,604 b. $63,396 c. $60,000 d. $3,396 ANSWER: RATIONALE:

a Present Value = $60,000 × Present Value Factor (of $1 to be received in one year, at 6% compounded annually) = $60,000 × 0.94340 = $56,604 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 77

Chapter 14 - Long-Term Liabilities: Bonds and Notes 128. When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that pay interest annually. The selling price of this bond issue was a. $321,970 b. $1,000,000 c. $943,494 d. $621,524 ANSWER: RATIONALE:

c Selling Price of Bonds = Present Value of Face Amount of $1,000,000 (due in 10 years, at 12% compounded annually) + Present Value of 10 Annual Interest Payments of $110,000 (at 12% compounded annually) Present Value of Face Amount of $1,000,000 (due in 10 years, at 12% compounded annually) = $1,000,000 × 0.32197 = $321,970 Present Value of 10 Annual Interest Payments of $110,000 (at 12% compounded annually) = $110,000 × 5.65022 = $621,524 Selling Price of Bonds = $321,970 + $621,524 = $943,494 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 78

Chapter 14 - Long-Term Liabilities: Bonds and Notes 129. Designer Company issued 10-year bonds on January 1. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Designer should record an interest expense (round to the nearest dollar) of a. $27,638 b. $24,000 c. $48,000 d. $55,277 ANSWER: RATIONALE:

a Interest Expense on July 1, Year 1 = Bond Carrying Amount × (Market Interest Rate ÷ 2) = $690,960 × (8% ÷ 2) = $690,960 × 4% = $27,638 As Designer uses the effective interest method to amortize bond discounts and premiums, the interest expense on July 1, Year 1, is $27,638. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 79

Chapter 14 - Long-Term Liabilities: Bonds and Notes 130. Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of a. $7,032 b. $7,500 c. $8,790 d. $14,065 ANSWER: RATIONALE:

a Interest Expense on July 1, Year 1 = Bond Carrying Amount × (Market Interest Rate ÷ 2) = $117,205 × (12% ÷ 2) = $117,205 × 6% = $7,032 As Merchant uses the effective interest method to amortize bond discounts and premiums, the interest expense on July 1, Year 1, is $7,032. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 131. When the effective interest method is used, the amortization of the bond premium a. increases interest expense each period b. decreases interest expense each period c. increases interest expense in some periods and decreases interest expense in other periods d. has no effect on the interest expense in any period ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM Copyright Cengage Learning. Powered by Cognero.

Page 80

Chapter 14 - Long-Term Liabilities: Bonds and Notes Matching Match each description below to the appropriate term (a–g). a. Contract rate b. Effective rate c. Bond discount d. Bond premium e. Bond f. Bond indenture g. Principal DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Reflective Thinking DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 2:11 PM 132. The face amount of each bond ANSWER: g POINTS: 1 133. A form of an interest-bearing note ANSWER: e POINTS: 1 134. The return required by the market on the day of issuance ANSWER: b POINTS: 1 135. If the contract rate exceeds the effective rate ANSWER: d POINTS: 1 136. The rate printed on the bond certificate ANSWER: a POINTS: 1

Page 81

Chapter 14 - Long-Term Liabilities: Bonds and Notes 137. If the contract rate is less than the effective rate ANSWER: c POINTS: 1 138. The contract between bond issuer and bond purchaser ANSWER: f POINTS: 1 Match each description below to the appropriate term (a–g). a. EPS b. Face value c. Callable bond d. Indenture e. Term bond f. Convertible bond g. Serial bond DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Reflective Thinking DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 4:01 PM 139. A measure of income earned by each share of common stock ANSWER: a POINTS: 1 140. The entire principal of the bond is paid back on maturity date ANSWER: e POINTS: 1 141. The value of a bond stated on the bond certificate ANSWER: b POINTS: 1

Page 82

Chapter 14 - Long-Term Liabilities: Bonds and Notes 142. The legal contract between issuer and bondholder ANSWER: d POINTS: 1 143. Allows the issuer to redeem bonds before maturity date ANSWER: c POINTS: 1 144. The principal of the bond issue is paid back in installments ANSWER: g POINTS: 1 145. Allows the bondholder to exchange bond for shares of stock ANSWER: f POINTS: 1

Page 83

Chapter 14 - Long-Term Liabilities: Bonds and Notes Subjective Short Answer 146. Two companies are financed as follows:

Bonds payable, 9% issued at face Common stock, $25 par

X Co. $5,000,000 3,000,000

Y Co. $3,000,000 3,000,000

Income tax is estimated at 40% of income for both companies. Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each. ANSWER: Earnings before interest and taxes Deduct interest on bonds Income before income tax Deduct income tax Net income Number of common shares Earnings per share on common stock

X Co. Y Co. $2,280,000 $2,280,000 270,000 450,000 $1,830,000 $2,010,000 804,000 732,000 $1,098,000 $1,206,000 ÷ 120,000 ÷ 120,000 $10.05 $9.15

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 2:16 PM

Page 84

Chapter 14 - Long-Term Liabilities: Bonds and Notes 147. Ulmer Company is considering the following alternative financing plans: Plan 1 $2,000,000 — 2,000,000

Issue 8% bonds at face value Issue preferred stock, $15 par Issue common stock, $10 par

Plan 2 $1,000,000 1,500,000 1,500,000

Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000. ANSWER: Earnings before bond interest and income tax Bond interest Balance Income tax Net income Dividends on preferred stock Earnings available for common stock Number of common shares Earnings per share on common stock

Plan 1

Plan 2

$600,000

160,0001

80,000 $520,000

$440,000

154,0002 182,000 $286,000 $338,000 0 100,000 $286,000 $238,000 200,000 150,000 $ 1.43 $ 1.59

1$2,000,000 × 8% 2$440,000 × 35% 3$1,000,000 × 8% 4$520,000 × 35%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 85

Chapter 14 - Long-Term Liabilities: Bonds and Notes 148. Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 par common stock

— $4,000,000

Plan 2 $3,000,000 1,000,000

Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000. ANSWER: Earnings before bond interest and income tax Bond interest expense Income before taxes Income tax Net income

Plan 1 Plan 2 $1,000,000 $1,000,000 0 300,000* $1,000,000 $700,000 400,000** 280,000*** $ 600,000 $420,000 0

Dividends on preferred stock Earnings available for common stock Number of common shares Earnings per share

$600,000 $420,000 ÷400,000 ÷100,000 $1.50

$4.20

*$3,000,000 × 10% **$1,000,000 × 40% ***$700,000 × 40%

POINTS: DIFFICULTY:

Page 86

Chapter 14 - Long-Term Liabilities: Bonds and Notes 149. Jenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 common stock

— $3,000,000

Plan 2 $2,000,000 1,000,000

ANSWER: Earnings before bond interest and income tax

Plan 1 Plan 2 $1,000,000 $1,000,000 0

Bond interest expense Balance Income tax Net income

$1,000,000 $800,000 320,000*** 400,000** $600,000 $480,000 0

Dividends on preferred stock Earnings available for common stock Number of common shares Earnings per share

200,000*

$600,000 $ 480,000 ÷300,000 $2.00

÷100,000 $4.80

*$2,000,000 × 10% **$1,000,000 × 40% ***$800,000 × 40% POINTS: DIFFICULTY:

Page 87

Chapter 14 - Long-Term Liabilities: Bonds and Notes 150. On the first day of the fiscal year, a company issues a $1,000,000, 7%, five-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the entry to record the issuance of the bonds. ANSWER:

Cash Discount on Bonds Payable Bonds Payable

884,171 115,829 1,000,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 151. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds. ANSWER:

Cash Discount on Bonds Payable Bonds Payable

437,740 62,260 500,000

POINTS: DIFFICULTY:

Page 88

Chapter 14 - Long-Term Liabilities: Bonds and Notes 152. On the first day of the fiscal year, a company issues a $1,000,000, 7%, five-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answers to the nearest dollar. ANSWER:

Interest Expense Discount on Bonds Payable Cash

46,583 11,583 35,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 3:50 PM 153. On the first day of the fiscal year, a company issues an $800,000, 6%, five-year bond that pays semiannual interest of $24,000 ($800,000 × 6% × 1/2), receiving cash of $690,960. Journalize the entry to record the first interest payment and the amortization of the related bond discount using the straight-line method. ANSWER:

Interest Expense Discount on Bonds Payable Cash

34,904 10,904 24,000

POINTS: DIFFICULTY:

Page 89

Chapter 14 - Long-Term Liabilities: Bonds and Notes 154. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000. Journalize the entry to record the issuance of the bonds. ANSWER:

Cash

530,000 Premium on Bonds Payable Bonds Payable

30,000 500,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 155. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $520,000. Journalize the entry to record the first interest payment and amortization of premium using the straight-line method. ANSWER:

Interest Expense Premium on Bonds Payable Cash

19,000 1,000 20,000

POINTS: DIFFICULTY:

Page 90

Chapter 14 - Long-Term Liabilities: Bonds and Notes 156. A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for $320,000. Journalize the redemption of the bonds. ANSWER:

Bonds Payable Discount on Bonds Payable Gain on Redemption of Bonds Cash

375,000 40,000 15,000 320,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 157. A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for $475,000. Journalize the redemption of the bonds. ANSWER:

Bonds Payable Loss on Redemption of Bonds Discount on Bonds Payable Cash

500,000 10,000 35,000 475,000

POINTS: DIFFICULTY:

Page 91

Chapter 14 - Long-Term Liabilities: Bonds and Notes 158. A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000. Journalize the redemption of the bonds. ANSWER:

Bonds Payable Gain on Redemption of Bonds Discount on Bonds Payable Cash

500,000 5,000 20,000 475,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 159. (a) Prepare the journal entry to issue $500,000 bonds that sold for $490,000. (b) Prepare the journal entry to issue $500,000 bonds that sold for $515,000. ANSWER:

(a) Cash 490,000 Discount on Bonds Payable 10,000 Bonds Payable 500,000 (b) Cash 515,000 Premium on Bonds Payable 15,000 Bonds Payable 500,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 92

Chapter 14 - Long-Term Liabilities: Bonds and Notes 160. Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year: May 1 Nov. 1 Dec. 31

Issued the bonds for cash at their face amount. Paid the interest on the bonds. Recorded accrued interest for two months.

ANSWER:

May

Nov. 1

Dec. 31

Cash Bonds Payable

10,000,000

Interest Expense Cash

400,000

Interest Expense Interest Payable

133,333

10,000,000

400,000

133,333

POINTS: DIFFICULTY:

Page 93

Chapter 14 - Long-Term Liabilities: Bonds and Notes 161. On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable semiannually, were sold for $1,225,000. Present entries to record the following transactions for the current fiscal year: (a) (b) (c)

Issuance of the bonds. First semiannual interest payment (record as separate entry from discount amortization). Amortization of bond discount for the year, using the straight-line method of amortization.

ANSWER:

(a) Cash 1,225,000 Discount on Bonds Payable 275,000 Bonds Payable 1,500,000 (b) Interest Expense 60,000 Cash 60,000 (c) Interest Expense 27,500 Discount on Bonds Payable 27,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 94

Chapter 14 - Long-Term Liabilities: Bonds and Notes 162. On the first day of the current fiscal year, $2,000,000 of 10-year, 7% bonds, with interest payable annually, were sold for $2,125,000. Present entries to record the following transactions for the current fiscal year: (a) (b) (c)

Issuance of the bonds. First annual interest payment (record as separate entry from premium amortization). Amortization of bond premium for the year, using the straight-line method of amortization.

ANSWER:

(a) Cash 2,125,000 Premium on Bonds Payable 125,000 Bond Payable 2,000,000 (b) Interest Expense 140,000 Cash 140,000 (c) Premium on Bonds Payable 12,500 Interest Expense 12,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 95

Chapter 14 - Long-Term Liabilities: Bonds and Notes 163. On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year: (a) (b)

Issuance of the bonds. Accrual of interest and amortization of bond discount for the first year, on December 31, using the straight-line method. Round to the nearest dollar when necessary.

ANSWER:

(a) Cash Discount on Bonds Payable Bonds Payable (b) Interest Expense Interest Payable

1,225,000 75,000 1,300,000 48,750

Interest Expense 1,563 Discount on Bonds Payable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

48,750

1,563

Page 96

Chapter 14 - Long-Term Liabilities: Bonds and Notes 164. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Prepare entries to record the following transactions for the current fiscal year: (a) (b) (c)

Issuance of the bonds. Second semiannual interest payment. Amortization of bond premium for the first year, using the straight-line method of amortization.

ANSWER:

(a) Cash

1,050,000 Premium on Bonds Payable Bonds Payable

(b) Interest Expense Cash (c) Premium on Bonds Payable Interest Expense

50,000 1,000,000 35,000 35,000 5,000 5,000

POINTS: DIFFICULTY:

Page 97

Chapter 14 - Long-Term Liabilities: Bonds and Notes 165. Present entries to record the selected transactions described below. (a) (b) (c)

Issued $2,750,000 of 10-year, 8% bonds at 97. Amortized bond discount for a full year, using the straight-line method. At the end of the third year, called bonds at 98. The bonds were carried at $2,692,250 at the time of the redemption.

ANSWER:

(a) Cash 2,667,500 Discount on Bonds Payable 82,500 Bonds Payable 2,750,000 (b) Interest Expense 8,250 Discount on Bonds Payable 8,250 (c) Bonds Payable 2,750,000 Loss on Redemption of Bonds 2,750 Discount on Bonds Payable 57,750 Cash 2,695,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 98

Chapter 14 - Long-Term Liabilities: Bonds and Notes 166. A company issued $1,000,000 of 30-year, 8% callable bonds on April 1, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 Apr. 1 Oct. 1 Year 3 Oct. 1

ANSWER:

Issued the bonds for cash at their face amount. Paid the interest on the bonds.

Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry for payment of interest.) Year 1 Apr. 1 Cash Bonds Payable Oct. 1 Interest Expense Cash

1,000,000 1,000,000 40,000 40,000

Year 3 Oct. 1 Bonds Payable 1,000,000 Loss on Redemption of Bonds 40,000 Cash 1,040,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 99

Chapter 14 - Long-Term Liabilities: Bonds and Notes 167. Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 July 1 Dec. 31 Year 5 Dec. 31

Issued the bonds for cash at their face amount. Paid the interest on the bonds.

Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)

ANSWER:

Year 1 July 1

Cash

2,000,000 2,000,000

Bonds Payable 90,000

Dec. 31 Interest Expense

90,000

Cash Year 5 Dec. 31 Bonds Payable

2,000,000

Gain on Redemption of Bonds Cash

60,000 1,940,000

POINTS: DIFFICULTY:

Page 100

Chapter 14 - Long-Term Liabilities: Bonds and Notes 168. On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000. Present entries to record the following transactions: (a) (b) (c)

Issuance of bonds. Payment of first semiannual interest on December 31 (record separate entry from premium amortization). Amortization by straight-line method of bond premium on December 31.

ANSWER:

(a) Cash Premium on Bonds Payable Bonds Payable

2,580,000

(b) Interest Expense Cash

100,000

80,000 2,500,000

(c) Premium on Bonds Payable 4,000 Interest Expense POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

100,000

4,000

Page 101

Chapter 14 - Long-Term Liabilities: Bonds and Notes 169. Calculate the total amount of interest expense over the life of the bonds for the following independent situations. (a) $100,000 face value, 10%, 10-year bonds issued at 101 (b) $240,000 face value, 5%, five-year bonds issued at 100 (c) $300,000 face value, 9%, six-year bonds issued at 98 ANSWER:

(a) $100,000 × 0.01 = $1,000 premium $100,000 × 0.10 = $10,000 annual cash payment $10,000 × 10 years = $100,000 $100,000 – $1,000 = $99,000 total interest expense (b) $240,000 × 0.05 = $12,000 annual cash payment $12,000 × 5 years = $60,000 total interest expense

(c) $300,000 × 0.02 = $6,000 discount $300,000 × 0.09 = $27,000 annual cash payment $27,000 × 6 years = $162,000 $162,000 + $6,000 = $168,000 total interest expense POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 4:02 PM

Page 102

Chapter 14 - Long-Term Liabilities: Bonds and Notes 170. (a) Prepare the journal entry to issue $100,000 bonds that sold for $94,000. (b) Prepare the journal entry to issue $100,000 bonds that sold for $104,000. ANSWER:

(a) Cash 94,000 Discount on Bonds Payable 6,000 Bonds Payable (b) Cash 104,000 Premium on Bonds Payable Bonds Payable POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

100,000

4,000 100,000

Page 103

Chapter 14 - Long-Term Liabilities: Bonds and Notes 171. Glover Corporation issued $2,000,000 of 7.5%, six-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1 at 97. Glover’s year-end is December 31. If required, round answers to the nearest whole amount. (a) Were the bonds issued at a premium, at a discount, or at par? (b) Was the market rate of interest higher, lower, or the same as the contract rate of interest? (c) If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? (d) What is the carrying value of the bonds on December 31? ANSWER:

(a) The bonds were issued at a discount. (b) The market rate of interest was higher than 7.5% since the bonds were issued at a discount. (c) $2,000,000 × 0.075 × 10/12 = $125,000 interest expense prior to amortization $2,000,000 – $1,940,000 = $60,000 discount on bonds payable $60,000/6 = $10,000 annual amortization of discount $10,000 × 10/12 = $8,333 current year’s amortization of discount $125,000 + $8,333 = $133,333 (d) $2,000,000 – $60,000 + $8,333 = $1,948,333 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 104

Chapter 14 - Long-Term Liabilities: Bonds and Notes 172. On January 1, Yeargan Company obtained a $125,000, seven-year 5% installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352. Journalize the following entries: (a) Issued the installment notes for cash on January 1. (b) Paid the first annual payment on the note. ANSWER:

(a) Cash

125,000 Notes Payable

125,000

(b) Interest Expense 6,250 Notes Payable 15,352 Cash 21,602 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 105

Chapter 14 - Long-Term Liabilities: Bonds and Notes 173. On January 1, Luther Co. issued a $1,000,000, five-year, 8% installment note payable with payments of $250,456 principal plus interest due on January 1 of each year for the next five years. (a) Prepare the adjusting journal entry at December 31 to accrue interest for the year. (b) Show the account(s) and amount(s) and where it(they) will appear on a multi-step income statement prepared on December 31. (c) Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31. ANSWER:

(a)

Interest Expense 80,000 Interest Payable

80,000

(b) Interest Expense = $80,000 reported as “Other expense” (c) Current liabilities: Interest Payable, $80,000 Notes Payable—Current Portion, $170,456 Long-term liabilities: Notes Payable, $829,544 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 106

Chapter 14 - Long-Term Liabilities: Bonds and Notes 174. On January 1, Marshall Co. issued a $360,000, three-year, 6% installment note payable with payments of $134,680 principal and interest due on January 1 for each of the next three years. (a) Prepare the adjusting journal entry to accrue interest at December 31, Year 2. If required, round answers to the nearest whole amount. (b) Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31, Year 2. ANSWER:

(a) Interest Expense Interest Payable

14,815 14,815

(b) Current liabilities: Interest Payable, $14,815 Notes Payable—Current Portion, $119,865 Long-term liabilities: Notes Payable, $127,056 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 3:51 PM

Page 107

Chapter 14 - Long-Term Liabilities: Bonds and Notes 175. On January 1, Year 1, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30 and December 31 to yield 6%. Use the following format and round figures to nearest dollar. The bonds were issued for $1,851,234. (a) Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method. Date Cash Paid Interest Expense Amortization Bond Carrying Value (b) Show how this bond would be reported on the balance sheet at December 31, Year 2. ANSWER:

(a)

Date

Cash Paid

Interest Expense

Amortization

Bond Carrying Value $1,851,234

1/1/Year 1 6/30/Year 1

$50,000

$55,537

$5,537

1,856,771

12/31/Year 1

50,000

55,703

5,703

1,862,474

6/30/Year 2

50,000

55,874

5,874

1,868,348

12/31/Year 2

50,000

56,050

6,050

1,874,398

(b) Bond payable $2,000,000 Unamortized bond discount (125,602)

$1,874,398

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 108

Chapter 14 - Long-Term Liabilities: Bonds and Notes 176. Given the following data, determine the times interest earned ratio. Net income, $70,000 Bonds payable, issued at face value, 8%, $5,000,000 Preferred stock, $50 par value, 6%, 10,000 shares issued and outstanding Tax rate is 30% ANSWER:

Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = [($70,000 ÷ 70%) + (8% × $5,000,000)] ÷ (8% × $5,000,000) = ($100,000 + $400,000) ÷ $400,000 = $500,000 ÷ $400,000 = 1.25

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/19/2017 9:33 PM

Page 109

Chapter 14 - Long-Term Liabilities: Bonds and Notes 177. Balance sheet and income statement data indicate the following:

Bonds payable, 8% (issued 2000, due 2024) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid (a) (b)

Company A $1,200,000

Company B $900,000

300,000

400,000

1,000,000 495,000 75,000 50,000 15,000

1,000,000 130,000 12,000 0 20,000

For each company, what is the times interest earned ratio (round to one decimal place)? Which company gives potential creditors the most protection?

ANSWER:

(a)

Company A

6.2

Company B

2.8

(b) Company A offers potential creditors the most protection. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM 178. Use the following tables to calculate the present value of a $25,000, 7%, five-year bond that pays $1,750 ($25,000 × 7%) interest annually, if the market rate of interest is 7% Present Value of $1 at Compound Interest Periods 5% 6% 1 0.95238 0.94340 2 0.90703 0.89000 3 0.86384 0.83962 4 0.82270 0.79209 5 0.78353 0.74726 6 0.74622 0.70496 7 0.71068 0.66506 8 0.67684 0.62741 9 0.64461 0.59190 10 0.61391 0.55840 Copyright Cengage Learning. Powered by Cognero.

7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835

10% 0.90909 0.82645 0.75132 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554 Page 110

Chapter 14 - Long-Term Liabilities: Bonds and Notes

Present Value of Annuity of $1 at Compound Interest Periods 5% 6% 7% 1 0.95238 0.94340 0.93458 2 1.85941 1.83339 1.80802 3 2.72325 2.67301 2.62432 4 3.54595 3.46511 3.38721 5 4.32948 4.21236 4.10020 6 5.07569 4.91732 4.76654 7 5.78637 5.58238 5.38929 8 6.46321 6.20979 5.97130 9 7.10782 6.80169 6.51523 10 7.72174 7.36009 7.02358

ANSWER:

10% 0.90909 1.73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457

Present value of face value of $25,000 due in 5 years at 7% compounded annually $25,000 × 0.71299 (present value factor of $1 for 5 periods at 7%)

$17,825*

Present value of 5 annual interest payments of $1,750 at 7% interest compounded annually $1,750 × 4.10020 (present value of annuity of $1 for 5 periods at 7%)

7,175*

Total present value of bonds *Rounded POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

$25,000*

Page 111

Chapter 14 - Long-Term Liabilities: Bonds and Notes 179. Using the following table, what is the present value of $15,000 to be received in 10 years, if the market rate is 5% compounded annually? Periods 1 2 3 4 5 6 7 8 9 10

5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391

6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55840

7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835

10% 0.90909 0.82645 0.75132 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554

ANSWER: POINTS: DIFFICULTY:

$15,000 × 0.61391= $9,208.65 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 112

Chapter 14 - Long-Term Liabilities: Bonds and Notes 180. Using the following table, what is the present value of $40,000 to be received in five years, if the market rate is 7% compounded annually? Periods 1 2 3 4 5 6 7 8 9 10

5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391

6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55840

7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835

10% 0.90909 0.82645 0.75132 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554

ANSWER: POINTS: DIFFICULTY:

$40,000 × 0.71299 = $28,519.60 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/2/2017 12:26 PM

Page 113

Chapter 14 - Long-Term Liabilities: Bonds and Notes 181. Given the following data, prepare the journal entry to record interest expense and any related amortization on December 31 of the first year using the effective interest rate method. Assume interest is paid annually on January 1. The bonds were issued on January 1 for $7,411,233. Bonds payable, maturing in 10 years = $8,000,000 Contract interest rate = 5% Market (effective) interest rate = 6% Round answers to nearest dollar. ANSWER:

Interest Expense 444,674 Discount on Bonds Payable 44,674 Interest Payable 400,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/4/2017 3:54 PM

Page 114

Chapter 15 - Investments and Fair Value Accounting True / False 1. Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 2. Investments that do not normally change in value are disclosed on the balance sheet as cash and cash equivalents. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 1

Chapter 15 - Investments and Fair Value Accounting 3. As with other assets, the cost of a bond investment includes all costs related to the purchase. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 4. If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 15 - Investments and Fair Value Accounting 5. When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 6. The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 15 - Investments and Fair Value Accounting 7. To record a bond investment made between interest payment dates, Investment in Bonds would be debited and Cash and Interest Revenue would be credited. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 8. When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 15 - Investments and Fair Value Accounting 9. If the proceeds from the sale of bond investments exceed the carrying amount of the bonds, a gain is realized. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 10. Any gains or losses on the sale of bonds normally would be reported in the Other income (loss) section of the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 5

Chapter 15 - Investments and Fair Value Accounting 11. An equity investment in less than 20% of another company’s stock is accounted for using the cost method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 12. Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 15 - Investments and Fair Value Accounting 13. The investor carrying an investment by the equity method records cash dividends received as an increase in the amount of the investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 14. Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 15 - Investments and Fair Value Accounting 15. The equity method causes the investment account to mirror the proportional changes in book value of the investee. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 16. Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 15 - Investments and Fair Value Accounting 17. The corporation owning all or a majority of the voting stock of another corporation is known as the parent company. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 18. When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 15 - Investments and Fair Value Accounting 19. The financial statements resulting from combining parent and subsidiary statements are called consolidated statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 20. It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 10

Chapter 15 - Investments and Fair Value Accounting 21. The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 22. When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 11

Chapter 15 - Investments and Fair Value Accounting 23. Held-to-maturity securities are reported on the balance sheet at fair market value. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 24. Held-to-maturity securities maturing beyond a year are reported as noncurrent assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 12

Chapter 15 - Investments and Fair Value Accounting 25. Trading securities should be reported on the financial statements at fair market value. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 26. Investments in bonds that management intends to hold to maturity are called trading securities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 15 - Investments and Fair Value Accounting 27. Investment in Bonds is reported on the balance sheet at lower of cost or market. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 28. Investment in Bonds is listed on the balance sheet after Bonds Payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 14

Chapter 15 - Investments and Fair Value Accounting 29. Held-to-maturity investments are recorded at their cost, which would include broker’s commissions. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 30. Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 15

Chapter 15 - Investments and Fair Value Accounting 31. Trading securities are reported on the balance sheet at cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 32. Any difference between the fair market values of the securities and their cost is a realized gain or loss. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 15 - Investments and Fair Value Accounting 33. Unrealized gains and losses on trading securities are not included in the calculation of income from operations. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 34. Investments in stocks that are expected to be held for the long term are listed in the Stockholders' equity section of the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 15 - Investments and Fair Value Accounting 35. In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 36. Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 18

Chapter 15 - Investments and Fair Value Accounting 37. A disadvantage of fair value use is that the comparability between companies may be impacted by different fair value measurements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 38. Growth firms generally pay regular dividends to stockholders. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 19

Chapter 15 - Investments and Fair Value Accounting 39. Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investments. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 40. Comprehensive income must be reported on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 20

Chapter 15 - Investments and Fair Value Accounting 41. The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 42. Comprehensive income does not affect net income or retained earnings. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 15 - Investments and Fair Value Accounting 43. The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 44. Foreign currency translation adjustment is an example of an item that would be included in other comprehensive income. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 22

Chapter 15 - Investments and Fair Value Accounting Multiple Choice 45. Temporary investments a. are reported as current assets b. include cash equivalents c. do not include equity securities d. All of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 46. Which of the following is not a reason to invest excess cash in temporary investments? a. earn interest revenue b. influence the operations of another company c. receive dividends d. realize gains from the increase in market value of the securities ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 47. Investment in certificates of deposit and other securities that do not change in value are reported on the balance sheet as a. equity investments b. available-for-sale securities c. cash and cash equivalents d. held-to-maturity securities ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 48. Which of the following is part of the primary objective of investing in temporary investments? a. All of these choices b. realize gains from increases in market price of the securities c. receive dividends d. earn interest revenue ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 49. A company uses cash to pay all of the following except a. All of these choices b. interest to creditors c. current expenses d. dividends to stockholders ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 50. Cash is used for all of the following activities except a. supporting current operating activities b. replacing worn-out machinery c. expanding current operations d. bribing government officials ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 51. Long-term investments are held for all of the following reasons except to a. reduce expenses b. stabilize the supply of resources c. improve operations by making changes to management d. meet current cash needs ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 52. Temporary investments such as in trading securities are a. recorded at cost but reported at fair market value b. recorded at cost and reported at cost c. recorded at cost but reported at lower of cost or fair market value d. recorded at fair market value and reported at fair market value ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 53. On June 1, $50,000 of treasury bonds were purchased between interest dates. The brokerage commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to Investments—Treasury Bonds? a. $50,000 b. $50,500 c. $49,500 d. $53,000 ANSWER: RATIONALE:

b Total Cost of Treasury Bonds = Cost of Treasury Bonds + Brokerage Commission = $50,000 + $500 = $50,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

54. On June 1, $40,000 of treasury bonds were purchased between interest dates. The brokerage commission was $600. The bon revenue will be recorded on July 1? a. $400 b. $406 c. $2,000 d. $2,400 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Interest Revenue Recorded on July 1 = Semiannual Interest Received on July 1 – Accrued In 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 55. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be a. debit Investments—Evans Company Bonds, $101,500; credit Cash, $101,500 b. debit Investments—Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500 c. debit Investments—Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash, $101,500 d. debit Investments—Evans Company Bonds, $100,000; credit Cash, $100,000 ANSWER:

RATIONALE:

Investments—Evans Company Bonds 100,000 Interest Receivable 1,500 Cash

101,500

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 56. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8%, and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be a. debit Cash, $4,000; credit Interest Revenue, $4,000 b. debit Cash, $4,000; credit Interest Receivable, $4,000 c. debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500 d. debit Cash, $2,500; credit Interest Revenue, $2,500 ANSWER: RATIONALE:

c Interest Revenue Recorded = Semiannual Interest to Be Received – Accrued Interest = [$100,000 × (8%/2)] – $1,500 = $4,000 – $1,500 = $2,500 Cash 4,000 Interest Receivable 1,500 Interest Revenue 2,500

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 57. Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be a. debit Cash, $105,000; credit Investments—Evans Company Bonds, $104,500, and Interest Revenue, $500 b. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000 c. debit Cash, $104,500, and Interest Receivable, $500; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 d. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 ANSWER: RATIONALE:

d Gain on Sale of Investments = Sale Price of Bonds – Purchase Price of Bonds = $104,500 – $100,000 = $4,500 Cash 105,000 Investments—Evans Company Bonds 100,000 Gain on Sale of Investments 4,500 Interest Revenue 500

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 58. Jacks Corporation purchases $200,000 bonds plus accrued interest for two months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a a. debit to Interest Receivable for $2,000 b. debit to Investment in Bonds for $202,000 c. debit to Cash for $200,000 d. credit to Interest Revenue for $2,000 ANSWER: RATIONALE:

a Investments—Kennedy Company Bonds Interest Receivable Cash

200,000 2,000 202,000

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 59. On April 1, Alliance Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a a. credit to Interest Payable for $2,000 b. debit to Investments—Tetter Company Bonds for $52,000 c. debit to Cash for $50,000 d. debit to Investments—Tetter Company Bonds for $50,000 ANSWER: RATIONALE:

d Investments—Tetter Company Bonds Interest Receivable Cash

50,000 2,000 52,000

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting Use this information for Pierce Company to answer the following questions. On May 1, Pierce Company purchased $60,000 of Stanton Company’s 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest. 60. The journal entry Pierce will record on June 30 will include a a. credit to Interest Revenue for $2,400 b. debit to Cash for $3,600 c. credit to Cash for $2,400 d. credit to Interest Receivable for $1,200 ANSWER: RATIONALE:

b Semiannual Interest Payment = $60,000 × 12% × 1/2 = $3,600 Interest Revenue = Semiannual Interest Payment – Accrued Interest = $3,600 – $2,400 = $1,200 Cash Interest Receivable Interest Revenue

3,600 2,400 1,200

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Pierce Company LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 61. The journal entry Pierce will record on February 1 will include a a. credit to Interest Revenue for $1,500 b. credit to Gain on Sale of Investments for $1,500 c. credit to Cash for $52,500 d. credit to Interest Receivable for $600 ANSWER: RATIONALE:

b The journal entry Pierce will record on February 1 will include a credit to Gain on Sale of Investments for $1,500. Proceeds from Sale of Investment – Book Value of Investment = ($50,000 × 103%) – $50,000 = $51,500 – $50,000 = $1,500 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Pierce Company LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 62. What are the total proceeds from the February 1 sale? a. $52,400 b. $51,500 c. $50,000 d. $52,000 ANSWER: RATIONALE:

d Sale Proceeds = $50,000 × 103% = $51,500 Accrued Interest = $50,000 × 12% × 1/12 = $500 Total Proceeds from Sale = $51,500 + $500 = $52,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Pierce Company LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 63. Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of the bonds at 97. The journal entry for the purchase would include a a. credit to Interest Receivable for $4,500 b. credit to Interest Revenue for $4,500 c. debit to Interest Receivable for $4,500 d. debit to Interest Revenue for $4,500 ANSWER:

RATIONALE:

Investments—ABC Co. Bonds Interest Receivable Cash

400,000 4,500 404,500

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 64. Interest revenue on bonds is reported as a. an addition to the investment in bonds account b. part of comprehensive income but not as part of net income c. part of other income d. part of operating income ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15 - Investments and Fair Value Accounting 65. Which of the following stock investments should be accounted for using the cost method? a. investments of less than 20% b. investments between 20% and 50% c. investments of less than 20% and investments between 20% and 50% d. All stock investments should be accounted for using the cost method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 66. Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is a. Cash Investments—Saxton Company Stock

4,500

b. Investments—Saxton Company Stock Cash

4,780

c. Investments—Saxton Company Stock Brokerage Fee Expense Cash

4,500 280

d. Investments—Saxton Company Stock Cash

4,500

ANSWER: RATIONALE:

4,500

4,780

4,500

b Total Investment = Purchase Price of Stock+ Brokerage Fees = ($45 × 100) + $280 = $4,500 + $280 = $4,780 Investments—Saxton Company 4,780 Stock Cash 4,780

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 9:58 PM

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Chapter 15 - Investments and Fair Value Accounting 67. Which of the following statements is not a reason a company may purchase another company's stock? a. earning a return on excess cash b. sustaining the other company's stock price c. gaining control of another company's operations d. developing or maintaining business relationships ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 68. The cost method of accounting for stock a. recognizes dividends as income b. is only appropriate as part of a consolidation c. requires the investment to be increased by the reported net income of the investee d. requires the investment to be decreased by the reported net income of the investee ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 69. An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale? a. $12,750 gain b. $600 gain c. $600 loss d. $9,250 loss ANSWER: RATIONALE:

b Gain on Sale = Proceeds from Sale – Purchase Price = ($49.50 × 100) – [($21,750/500) × 100] = $4,950 – $4,350 = $600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 70. The equity method of accounting for investments requires a. a year-end adjustment to revalue the stock to lower of cost or market b. the investment to be reported at its original cost c. the investment to be increased by the reported net income of the investee d. the investment to be increased by the dividends paid by the investee ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 71. Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the a. equity method b. market method c. cost or market method d. cost method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 72. Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to a. Investment in Vallerio b. Retained Earnings c. Dividend Revenue d. Dividend Receivables ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 73. The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the a. cost method b. market method c. income method d. equity method ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 74. When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as a(n) a. prior period adjustment b. operating income and loss c. paid-in capital addition d. gain or loss ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 75. Which of the following items would not affect the investor's income for the period? a. interest received on a temporary investment in bonds b. dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock c. dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock d. interest received on a long-term investment in bonds ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 76. Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the a. investment only b. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased c. investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased d. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 77. Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a longterm investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives? a. debit Investments—Worton Corporation; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 9:58 PM 78. Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a longterm investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation? a. debit Investments—Worton Corporation Stock; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation Stock; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation Stock ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 79. Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a a. credit to cash for $9,000 b. debit to the investment account for $9,000 c. credit to the investment account for $9,000 d. credit to a loss account for $9,000 ANSWER: RATIONALE:

c Loss on Investment in Tomas Corporation = $20,000 × 45% = $9,000 Cash Investments—Tomas Corporation Stock

9,000 9,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 80. Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the a. parent b. minority interest c. affiliate d. subsidiary ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 81. Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the a. parent b. minority interest c. affiliate d. subsidiary ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 82. Financial statements in which financial data for two or more companies are combined as a single entity are called a. conventional statements b. consolidated statements c. audited statements d. constitutional statements ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 83. In general, consolidated financial statements should be prepared a. when a corporation owns more than 20% and less than 40% of the common stock of another company b. when a corporation owns more than 50% of the common stock of another company c. only when a corporation owns 100% of the common stock of another company d. whenever the market value of the stock investment is significantly lower than its cost ANSWER: POINTS: DIFFICULTY:

Page 47

Chapter 15 - Investments and Fair Value Accounting 84. For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor b. whether the acquisition of the stock by the investor was "friendly" or "hostile" c. the extent of an investor's influence over the operating and financial affairs of the investee d. whether the stock has paid dividends in past years ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 85. An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale? a. $3,500 gain b. $350 gain c. $350 loss d. $500 gain ANSWER: RATIONALE:

c Gain or Loss on Sale = Sale Proceeds of 100 Shares – Purchase Price of 100 Shares = $35 × 100 – ($19,250/500) × 100 = $3,500 – $3,850 = ($350) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 86. When the cost method is used to account for an investment, the carrying value of the investment is affected by a. the dividend distributions of the investee b. the periodic net income of the investee c. the earnings and dividend distributions of the investee d. neither the earnings nor the dividends of the investee ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 87. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase would include a a. debit to Investments—Lucas Company Stock for $132,000 b. credit to Cash for $132,000 c. debit to Investments—Lucas Company Stock for $132,240 d. credit to Investments—Lucas Company Stock for $240 ANSWER: RATIONALE:

c Cost of Investment in Shares of Lucas Company = Purchase Price + Brokerage Fees = ($22 × 6,000 shares) + $240 = $132,240 Investment in Lucas Company Stock 132,240 Cash 132,240

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 88. The company whose stock is more than 50% owned by another company is called the a. controlling company b. investee company c. subsidiary company d. sibling company ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 89. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include a a. debit to Cash, $111,840 b. credit to Investments—Lucas Company Stock, $112,000 c. credit to Loss on Sale, $23,680 d. debit to Cash, $112,000 ANSWER: RATIONALE:

a Proceeds on Sale of Lucas Stock = ($28 × 4,000) – $160 = $111,840 Cash

111,840

Investments—Lucas Company Stock

111,840

POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 90. If one company owns more than 50% of the common stock of another company, a. a partnership exists b. a parent-subsidiary relationship exists c. the company whose stock is owned must be liquidated d. the cost method should be used to account for the investment ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 91. Held-to-maturity securities a. are reported at fair market value b. include stocks as well as bonds c. may be reported as current or noncurrent assets d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 92. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. a loss of $2,000 on the income statement and net trading securities of $13,000 on the balance sheet b. no loss on the income statement and net trading securities of $13,000 on the balance sheet c. no loss on the income statement, net trading securities of $11,000, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet ANSWER: RATIONALE:

d Loss Recorded on Income Statement = Fair Value of Investment – Original Cost of Investment = $11,000 – $13,000 = ($2,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 93. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. a loss of $2,000 on the income statement and available-for-sale investments of $13,000 on the balance sheet b. no loss on the income statement and available-for-sale investments of $13,000 on the balance sheet c. no loss on the income statement, available-for-sale investments of $11,000, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet ANSWER: RATIONALE:

c Loss Recorded as Part of Stockholders’ Equity = Fair Value of Investment – Original Cost of Investment = $11,000 – $13,000 = ($2,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 94. The price that would be received to sell an asset or pay off a liability is the a. fair value b. market value c. investing value d. historical value ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 95. The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 96. The account Unrealized Gain (Loss) on Trading Investments should be included on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 97. The valuation allowance for trading investments account is found on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 98. Held-to-maturity securities a. are reported at their fair market value on the balance sheet date b. include both stocks and bonds c. are primarily purchased to earn interest revenue d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 99. On January 1, Butte Company’s valuation allowance for trading investments account has a debit balance of $23,200. On December 31, the cost of the trading securities portfolio was $80,000. The fair value was $98,000. Which of the following would Butte report on the income statement for the current year? a. an unrealized loss on trading investments, $5,200 b. an unrealized gain on trading investments, $5,200 c. an unrealized gain on trading investments, $18,000 d. an unrealized loss on trading investments, $18,000 ANSWER: RATIONALE:

a Gain on Trading Securities Portfolio = Fair Value of Investment – Original Cost of Investment = $98,000 – $80,000 = $18,000 Unrealized Gain/(Loss) on Trading Investments = $18,000 – $23,200 = ($5,200) POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 100. Trading securities are a. reported at fair value on the balance sheet and as unrealized gains or losses on the income statement b. not reported on the balance sheet c. reported as unrealized gains or losses on the income statement d. reported at fair value in the balance sheet ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 101. GAAP requires trading and available-for-sale investments to be reported at their a. fair value b. historical cost c. market value d. net realizable value ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 102. Changes in the value of available-for-sale securities are a. reported as part of stockholders' equity b. recognized on the income statement c. not recognized d. recognized on the income statement and as part of stockholders' equity ANSWER: POINTS: DIFFICULTY:

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Chapter 15 - Investments and Fair Value Accounting 103. All of the following are true of fair value accounting except a. GAAP requires trading and available-for-sale investments to be recorded at fair value b. fair value measurements have become more reliable c. the differences between original cost and fair value are reported in valuation allowance accounts d. fair values only affect balance sheet accounts ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 104. Financial statements include assets listed at a. All of these choices b. their fair value c. their historical cost d. their market value ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 105. All of the following are true of the effect of fair value accounting on the financial statements except a. any difference between the original cost or the prior period’s fair value must be recorded b. changes in the fair value of trading securities are recognized on the income statement c. valuation allowance accounts are reported on the balance sheet d. changes in the fair value of available-for-sale securities are recognized on the income statement ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 106. Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison’s dividend yield is a. 5% b. 10% c. 25% d. 20% ANSWER: RATIONALE:

a Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $4/$80 = 5% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 107. A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a dividend of $0.40 per share. The market value of the stock is $16 per share. The company’s dividend yield is a. 2.5% b. 400% c. 16% d. 40% ANSWER: RATIONALE:

a Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $0.40/$16 = 2.5% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 108. The dividend yield is measured as a. Dividends per Share of Common Stock/Market Price per Share of Common Stock b. Dividends per Share of Preferred Stock/Market Price per Share of Common Stock c. Dividends per Share of Common Stock × Market Price per Share of Preferred Stock d. Dividends per Share of Preferred Stock × Market Price per Share of Preferred Stock ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 109. On July 5, Winter Company had a market price of $58 per share of common stock. For the prior year, Winter Company had paid an annual dividend of $3.48 per share. What is the dividend yield for Winter Company? a. 6.0% b. 0.6% c. 16.67% d. 1.67% ANSWER: RATIONALE:

a Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $3.48/$58 = 6.0% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 110. Which of the following is not a part of comprehensive income? a. foreign currency items b. cash flows from stock investments c. unrealized gains and losses on available-for-sale securities d. pension liability adjustments ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 111. Which of the following would be considered an "other comprehensive income" item? a. net income b. extraordinary loss related to flood c. gain on disposal of discontinued operations d. unrealized loss on available-for-sale securities ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 112. Companies may report comprehensive income on each of the following statements except a. the income statement b. a separate statement of comprehensive income c. the statement of cash flows d. the retained earnings statement ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM Matching Match each of the definitions that follow with the appropriate investment term (a–j). a. Debt securities b. Equity securities Copyright Cengage Learning. Powered by Cognero.

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Chapter 15 - Investments and Fair Value Accounting c. Investor d. Investee e. Cost method f. Trading securities g. Available-for-sale securities h. Held-to-maturity securities i. Equity method j. Business combination DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCT.WARD.18.15-03 - 15-03 ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM 113. Debt and equity securities purchased and sold to earn short-term profits from changes in the market price ANSWER: f POINTS: 1 114. Preferred and common stocks that represent ownership in a company and do not have a fixed maturity date ANSWER: b POINTS: 1 115. The method of reporting an investment that represents less than 20% of the voting stock of another company ANSWER: e POINTS: 1 116. When using this, dividends are treated as a reduction of the investment ANSWER: i POINTS: 1 117. Notes and bonds that pay interest and have a fixed maturity ANSWER: a POINTS: 1 118. Debt investments that a company intends to keep until their maturity date ANSWER: h POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15 - Investments and Fair Value Accounting 119. Securities not held for trading or to maturity or other strategic reasons ANSWER: g POINTS: 1 120. The company investing in another company’s stock ANSWER: c POINTS: 1 121. What occurs when a company purchases 50% or more of another company’s stock ANSWER: j POINTS: 1 122. The company whose stock is purchased by another entity ANSWER: d POINTS: 1 Match each of the definitions that follow with the appropriate investment term (a–j). a. Equity method b. Parent company c. Subsidiary company d. Consolidated financial statements e. Fair value f. Unrealized gain or loss on investments. g. Valuation allowance for investments h. Dividend yield i. Amortized cost j. Cost method DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCT.WARD.18.15-04 - 15-04 ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:13 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 123. A corporation owning all or the majority of the voting stock of another corporation ANSWER: b POINTS: 1 124. A balance sheet account where the fair value adjustment for investments is reported ANSWER: g POINTS: 1 125. A corporation controlled by another corporation that owns all or the majority of its voting stock ANSWER: c POINTS: 1 126. The method of accounting for investments of 20% to 50% in another company’s stock ANSWER: a POINTS: 1 127. The market price that would be received if an investment were sold ANSWER: e POINTS: 1 128. Measurement of the rate of return to stockholders based on cash dividends ANSWER: h POINTS: 1 129. Combined reporting of a corporation and other corporations it controls ANSWER: d POINTS: 1 130. Recognition of changes in the fair value of short-term investments ANSWER: f POINTS: 1 131. The value assigned to held-to-maturity securities ANSWER: i POINTS: 1 132. Appropriate method for accounting for small stock investments ANSWER: j POINTS: 1

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Chapter 15 - Investments and Fair Value Accounting Subjective Short Answer 133. Discuss why companies invest cash in short-term temporary investments vs. long-term investments. ANSWER:

When companies temporarily have excess cash not needed for current operations, they often invest it in debt or equity securities. These investments can be short or long term in nature. The primary reason companies invest short term is to earn interest or dividends and to realize gains from the increase in the market price of the securities. When companies make temporary investments, they are listed as current assets on the balance sheet.

Long-term investments may be made for the same reasons. However, many longterm investments involve the purchase of stock of another company. This type of purchase may be made for strategic reasons such as an attempt to reduce operating costs, replace management, expand, or integrate. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 134. Define debt securities and equity securities. Include their similarities and differences in your discussion. ANSWER:

Debt securities are notes and bonds that pay interest and have a fixed maturity date. Equity securities are shares of preferred and common stock that represent ownership in a company and do not have a fixed maturity date. Investments in both types of securities may be for the short term with the objectives to earn interest or dividends and realize gains from increases in the price of the securities. Investments in both types of securities may also be for the long term. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 135. On May 1, Knox Inc. purchases $100,000 of 10-year, 6% Madison Corporation bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the bond purchase. Investments—Madison Corporation Bonds 100,000 Interest Receivable ($100,000 × 6% × 2/12) 1,000 Cash POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM ANSWER:

101,000

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Chapter 15 - Investments and Fair Value Accounting 136. On May 1, Cedar Inc. purchases $100,000 of 10-year, Madison Corporation 6% bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the semiannual receipt of interest on September 1. ANSWER:

Cash Interest Receivable ($100,000 × 6% × 2/12) Interest Revenue ($100,000 × 6% × 4/12)

3,000 1,000 2,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 137. On May 1, Cedar Inc. purchases $150,000 of 10-year, Knox Corporation 8% bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the semiannual receipt of interest on March 1, Year 2. Cash 6,000 Interest Revenue 6,000 ($150,000 × 8% × 6/12) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM ANSWER:

Page 70

Chapter 15 - Investments and Fair Value Accounting 138. On October 1, Marcus Corporation purchased $20,000 of 6% bonds of Roberts Corporation, due in 8½ years. The bonds were purchased at their face amount plus interest of $400 accrued from July 1, the date of the last semiannual interest payments. Journalize the purchase. Oct. 1 ANSWER:

Investments—Roberts Corporation Bonds Interest Receivable Cash

20,000 400 20,400

POINTS: DIFFICULTY:

Page 71

Chapter 15 - Investments and Fair Value Accounting 139. On September 1, Parsons Company purchased $84,000, 10-year, 7% government bonds at 100 plus accrued interest. The semiannual interest payment dates are June 30 and December 31. Interest calculations are done by the month. (a) Journalize the entry to record the bond purchase. (b) Journalize the receipt of interest on December 31 of the first year. (c) Journalize the sale of the bonds on February 1 of the second year for $82,000 plus accrued interest. ANSWER:

(a)

(b)

(c)

Year 1 Sept. 1

Dec. 31

Year 2 Feb. 1

Investments—Government Bonds Interest Receivable Cash * $84,000 × 7% × 2/12

84,000 980*

Cash Interest Receivable Interest Revenue $84,000 × 7% × 6/12

2,940*

Cash Loss on Sale of Investments Investments—Government Bonds Interest Revenue *$82,000 + ($84,000 × 7% × 1/12)

82,490* 2,000

84,980

980 1,960

84,000 490

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 72

Chapter 15 - Investments and Fair Value Accounting 140. Journalize the entries to record the following selected bond investment transactions for Southwest Bank: Apr. 1 Purchased $400,000 of Daytona Beach 4.5% bonds at 100 plus accrued interest of $4,500. July 1 Sept. 1

Received the first semiannual interest. Sold $250,000 of the bonds at 97, plus accrued interest of $1,875.

ANSWER:

(a) Investments—Daytona Beach Bonds Interest Receivable Cash

400,000 4,500

(b) Cash Interest Receivable Interest Revenue *$400,000 × 4.5% × ½

9,000*

244,375 7,500

Sale proceeds ($250,000 × 97%) Accrued interest Total proceeds from sale

$242,500 1,875 $244,375

404,500

4,500 4,500

1,875 250,000

POINTS: DIFFICULTY:

Page 73

Chapter 15 - Investments and Fair Value Accounting 141. On August 1, Year 1, Ant Company sold Bee Company $1,500,000 of 10-year, 6% bonds, dated July 1 at 100 plus accrued interest. On March 1, Year 2, Bee sold half of the bonds for $782,500 plus accrued interest. Present entries to record the following transactions: Bee Company: (a) Purchase of bonds on August 1, Year 1. (b) Receipt of first semiannual interest amount on December 31, Year 1. (c) The sale of the bonds on March 1, Year 2. ANSWER: (a) Investments—Ant Company Bonds Interest Receivable ($1,500,000 × 6% × 1/12) Cash

1,500,000 7,500 1,507,500

(b) Cash Interest Revenue Interest Receivable

45,000

790,000

37,500 7,500

7,500 32,500 750,000

POINTS: DIFFICULTY:

Page 74

Chapter 15 - Investments and Fair Value Accounting 142. Journalize the entries to record the following selected transactions of Oliver Co.: May 1 Purchased $100,000 of Kruse Co. 6% bonds at their face amount plus accrued interest of $2,000. July 1 Received first semiannual interest payment. Sept. 1 Sold the bonds at 97 plus accrued interest of $1,000.

ANSWER:

(a) Investments—Kruse Co. Bonds 100,000 Interest Receivable 2,000 Cash 102,000 (b) Cash 3,000 Interest Receivable 2,000 Interest Revenue 1,000 (c) Cash 98,000 Loss on Sale of Investments 3,000 Investments—Kruse Co. Bonds 100,000 Interest Revenue 1,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 75

Chapter 15 - Investments and Fair Value Accounting 143. Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds. Present entries following selected transactions:

Mar. 1 Purchased bonds at their face amount for $500,000. May 1 Sold half the bonds at 98 plus accrued interest of $3,750. The broker deducted $200 for brokerage fees and taxes, re balance. ANSWER:

Mar. 1 Investments—Benton Corporation Bonds

500,000

Cash

500,000

May 1 Cash

248,550

Loss on Sale of Investment

5,200

Investments—Benton Corporation Bonds

250,000

Interest Revenue

3,750

POINTS: DIFFICULTY:

Page 76

Chapter 15 - Investments and Fair Value Accounting 144. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of Lucas Company. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. Prepare the journal entries for the original purchase, dividend, and sale. ANSWER:

Feb. 12 Investments—Lucas Company Stock 132,240* Cash 132,240 *(6,000 shares × $22 per share) + $240 Aug.22 Cash Dividend Revenue *$0.42 per share × 6,000 shares Nov.10 Cash Gain on Sale of Investments Investments—Lucas Company Stock *(4,000 shares × $28) – $160 **4,000 shares × $132,240/6,000 shares

2,520* 2,520

111,840* 23,680 88,160**

POINTS: DIFFICULTY:

Page 77

Chapter 15 - Investments and Fair Value Accounting 145. On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for $205,000. For the year ending December 31, McGuire earned income of $48,000 and paid dividends of $14,000. Prepare the entries for Todd Company for the purchase of the stock, share of McGuire income, and dividends received from McGuire. Jan. 2 ANSWER:

Investments—McGuire Company Stock

205,000

Cash Dec. 31

Investments—McGuire Company Stock Income of McGuire Company 40% × $48,000

205,000

19,200 19,200

Dec. 31 Cash 5,600 Investments—McGuire Company Stock 5,600 40% × $14,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 146. Journalize the entries to record the following selected equity investment transactions completed by Perry Company during the current year. Perry accounts for this investment using the cost method. Feb. 2

Apr. 16 June 17 Aug. 19 Nov. 14

ANSWER:

Purchased for cash 900 shares of Dexter Co. stock for $54 per share plus a $450 brokerage commission. This represents a less than 10% ownership interest in the company. Received dividends of $0.25 per share on Dexter Co. stock. Sold 200 shares of Dexter Co. stock for $70 per share less a $500 brokerage commission. Purchased 600 shares of Dexter Co. stock for $65 per share plus a $300 brokerage commission. Received dividends of $0.30 per share on Dexter Co. stock. Feb. 2

Investments—Dexter Co. Stock Cash (900 shares × $54) + $450

49,050 49,050

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Chapter 15 - Investments and Fair Value Accounting

Apr. 16 Cash Dividend Revenue 900 shares × $0.25

225 225

June 17 Cash Investments—Dexter Co. Stock Gain on Sale of Investments (200 shares × $70) – $500 $49,050/900 = $54.50 share price $54.50 × 200 = $10,900

13,500

Aug. 19 Investments—Dexter Co. Stock Cash (600 shares × $65) + $300

39,300

10,900 2,600

Nov. 14 Cash 390 Dividend Revenue 900 – 200 + 600 = 1,300 shares × $0.30

39,300

390

POINTS: DIFFICULTY:

Page 79

Chapter 15 - Investments and Fair Value Accounting 147. Ramiro Company purchased 40% of the outstanding stock of Marco Company on January 1. Marco reported net income of $95,000 and declared dividends of $35,000 during the year. How much would Ramiro adjust its investment in Marco Company under the equity method? ANSWER:

Ramiro’s share of Marco’s reported net income (40% × $95,000) Less: Ramiro’s share of the Marco’s dividend (40% × $35,000) Increase in Investments—Marco Company Stock

$38,000 14,000 $24,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 148. Pepito Company purchased 40% of the outstanding stock of Reyes Company on January 1. Reyes reported net income of $75,000 and declared dividends of $15,000 during the current year. How much would Pepito adjust its investment in Reyes Company under the equity method? ANSWER:

Pepito’s share of Reyes' reported net income (40% × $75,000) Less: Pepito’s share of the Reyes dividend (40% × $15,000) Increase in Investments—Reyes Company Stock

$30,000 6,000 $24,000

POINTS: DIFFICULTY:

Page 80

Chapter 15 - Investments and Fair Value Accounting 149. Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1. Roberts reported net income of $155,000 and declared dividends of $40,000 during the year. How would these events be reported by Sutton using the cost method? ANSWER:

When using the cost method, there is no adjustment to the investment for the investor’s share of income or dividends. As the owner of 10% of the stock, Sutton would receive $4,000 of the declared dividend, which would be reported as other income. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 81

Chapter 15 - Investments and Fair Value Accounting 150. Journalize the entries to record the following selected equity investment transactions completed by Flurry Company during the current year. Flurry’s purchase represents less than 20% of the total outstanding Braxter Co. stock. Feb. 2 Apr. 16 June 17

ANSWER:

Purchased for cash 500 shares of Braxter Co. stock for $34 per share plus a $250 brokerage commission. Received dividends of $0.35 per share on Braxter Co. stock. Sold 100 shares of Braxter Co. stock for $40 per share less a $100 brokerage commission. Feb. 2

Investments—Braxter Co. Stock Cash (500 × $34) + $250

17,250 17,250

Apr. 16 Cash Dividend Revenue 500 × $0.35

175

June 17 Cash Investments—Braxter Co. Stock Gain on Sale of Investments (100 × $40) – $100 $17,250/500 = $34.50 × 100

3,900

175

3,450 450

POINTS: DIFFICULTY:

Page 82

Chapter 15 - Investments and Fair Value Accounting 151. On March 1, Year 1, Chase Inc. purchases 35% of the outstanding shares of Glory Corporation stock for $325,000. On December 31, Year 1, Glory reports net income of $162,000. On January 15, Year 2, Glory pays total dividends to stockholders of $33,000. Journalize the three transactions. ANSWER:

Mar. 1

Dec. 31

Jan. 15

Investments—Glory Corporation Stock Cash

325,000

Investments—Glory Corporation Stock Income of Glory Corporation

56,700

Cash Investments—Glory Corporation Stock

11,550

325,000

56,700

11,550

POINTS: DIFFICULTY:

Page 83

Chapter 15 - Investments and Fair Value Accounting 152. Prepare the journal entries for the following transactions for Batson Co. Sept. 1 Batson Co. purchased 1,200 shares of the total of 100,000 outstanding shares of Michael Corp. stock for $20.75 per share plus a $70 commission. Dec. 31 Michael Corp.’s total earnings for the period are $84,000. 31 Michael Corp.’s paid a total of $40,000 in cash dividends to shareholders of record. ANSWER:

Sept. 1 Investments—Michael Corp. Stock Cash (1,200 × $20.75) + $70 Dec. 31 No entry Dec. 31 Cash Dividend Revenue ($40,000/100,000 × 1,200)

24,970 24,970

480 480

POINTS: DIFFICULTY:

Page 84

Chapter 15 - Investments and Fair Value Accounting 153. Prepare the journal entries for the following transactions for Morgan Co.

July 1 Morgan Co. purchased 32,000 shares of the total of 100,000 outstanding shares of Gordon Corp. stock for $10 per sh commission. Dec. 31 Gordon Corp.'s total earnings for the period are $80,000. 31 Gordon Corp. paid a total of $45,000 in cash dividends.

ANSWER:

July 1 Investments—Gordon Corp. Stock Cash Dec. 31 Investments—Gordon Corp. Stock Income of Gordon Corp. $80,000 × 32% Dec. 31 Cash

320,400 320,400 25,600 25,600 14,400

Investments—Gordon Corp. Stock $45,000 × 32%

14,400

POINTS: DIFFICULTY:

154. Present entries to record the following selected transactions of Masterson Co. Aug. 1 Purchased 600 shares of the 100,000 shares outstanding $10 par common shares of Dankin Corporation for $5,100. 1 Purchased 3,500 shares of the 10,000 shares no par common shares of Ramon Co. for $45,700. The investment was the equity method. Sept. 1 Received a cash dividend of $1 per share on the Dankin Corporation stock acquired on August 1. 1 Received a cash dividend of $2 per share on the Ramon Co. stock acquired on August 1. Dec. 31 Sold 100 shares of the Dankin Corporation shares acquired on August 1 for $2,100. 31 Dankin Corporation reported net income of $30,000 and Ramon Company’s reported net income was $50,000.

ANSWER:

Aug. 1

Page 85

Chapter 15 - Investments and Fair Value Accounting Investments—Dankin Corporation Stock Cash Aug. 1 Investments—Ramon Co. Stock Cash Sept. 1 Cash Dividend Revenue Sept. 1 Cash Investments—Ramon Co. Stock Dec. 31 Cash Investments—Dankin Corporation Stock ($5,100/6) Gain on Sale of Investments Dec. 31 Investments—Ramon Co. Stock

5,100 5,100 45,700 45,700 600 600 7,000 7,000 2,100 850 1,250 17,500

Income of Ramon Co. ($50,000 × 35%)

17,500

POINTS: DIFFICULTY:

Page 86

Chapter 15 - Investments and Fair Value Accounting 155. Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company. ANSWER:

If an investor purchases more than 50% of another company, the investor is considered to have control over the investee. The purchase is deemed a business combination. The corporation that owns the majority interest is called the parent company; the controlled company is called the subsidiary.

Parent and subsidiary corporations may continue to maintain separate accounting records throughout the year and prepare their own financial statements. If that is the case, at the end of the year, the financial statements of the parent and subsidiary(ies) are combined into consolidated financial statements. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 156. On January 1, the valuation allowance for trading investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000. Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments. Dec. 31 Valuation Allowance for Trading Investments 2,800 Unrealized Gain on Trading Investments POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM ANSWER:

2,800

Page 87

Chapter 15 - Investments and Fair Value Accounting 157. Skyline, Inc. purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Name Alcon, Inc. Easton Company Panther Company Total

Number of Shares 1,200 700 300

Total Cost Total Fair Value $16,000 $15,000 23,000 21,500 9,000 9,200 $48,000 $45,700

(a) Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31. (b) Where will the information from the journal entry be reported on the financial statements?

ANSWER:

(a) Unrealized Loss on Trading Investments Valuation Allowance for Trading Investments

2,300 2,300

$45,700 – $48,000 (b) The unrealized loss will be reported on the income statement as part of other income or loss. The valuation allowance will reduce the value of the portfolio on the balance sheet. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 88

Chapter 15 - Investments and Fair Value Accounting 158. Skyline, Inc. purchased a portfolio of available-for-sale securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Name Blackstone, Inc. Flagler Company Patterson Corporation Total

Number of Shares 400 200 600

Total Cost Total Fair Value $ 4,000 $ 5,200 3,000 2,700 7,500 9,800 $14,500 $17,700

(a) Provide the journal entry to record the adjustment of the available-for-sale security portfolio to fair value on December 31. (b) Where will the information from the journal entry be reported on the financial statements?

ANSWER:

(a) Valuation Allowance for Available-for-Sale Investments Unrealized Gain (Loss) on Available-forSale Investments $17,700 – $14,500

3,200 3,200

(b) The unrealized gain will be reported on the balance sheet as part of stockholders’ equity. The valuation allowance will increase the value of the portfolio in the Assets section on the balance sheet. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:09 PM

Page 89

Chapter 15 - Investments and Fair Value Accounting 159. The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before considering the following: During the year, the company purchased trading securities. At year-end, the fair value of the investment portfolio was $23,000 less than cost. The balance of Retained Earnings was $823,000 on January 1. Hudson Company paid $43,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31. ANSWER: Retained earnings, January 1 Plus net income* Less dividends Retained earnings, December 31

$ 823,000 322,000 $1,145,000 43,000 $1,102,000

*Because these are trading securities, the decrease in fair market value is part of the net income calculation ($345,000 – $23,000). POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 90

Chapter 15 - Investments and Fair Value Accounting 160. The income statement for Dobson Corporation reported net income of $22,400 for the year ended December 31 before considering the following: During the year, the company purchased available-for-sale securities. At year-end, the fair value of the investment portfolio was $2,100 more than cost. The balance of Retained Earnings was $83,000 on January 1. Dobson Corporation paid $9,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31. ANSWER: Retained earnings, January 1 Plus net income*

$ 83,000 22,400 $105,400 9,000 $ 96,400

Less dividends Retained earnings, December 31

*Because these are available-for-sale securities, the increase in fair market value is part of stockholders’ equity, not net income. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM 161. During the first year of operations, Makala Company purchased two available-for-sale investments as follows: Security Oceanna Company Rockledge, Inc.

Shares Purchased 700 1,900

Cost $29,000 41,000

Assume that as of December 31, Oceanna Company's stock had a market value of $49 per share and Rockledge, Inc.'s stock had a market value of $20 per share. Makala had 10,000 shares of no par stock outstanding that was issued for $150,000. For the year ending December 31, Makala had a net income of $105,000. No dividends were paid. (a) (b)

Prepare the Current assets section of the balance sheet for the available-for sale securities as of December 31. Prepare the Stockholders’ equity section of the balance sheet as of December 31.

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Chapter 15 - Investments and Fair Value Accounting ANSWER:

(a) Makala Company Balance Sheet (selected items) December 31 Assets Current assets: Available-for-sale investments, at cost Plus valuation allowance for available-for-sale investments

$70,000 2,300* $72,300

*Computation: Market: Oceanna Company: 700 shares × $49

$34,300

Rockledge, Inc.: 1,900 shares × $20

38,000

Subtotal

$72,300

Cost ($29,000 + $41,000)

70,000

Unrealized gain

$ 2,300

(b) Makala Company Balance Sheet (selected items) December 31 Stockholders’ Equity Common stock $150,000 Retained earnings 105,000 Unrealized gain (loss) on available-for-sale investments 2,300 Total stockholders’ equity $257,300 POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:12 PM

Page 92

Chapter 15 - Investments and Fair Value Accounting 162. Discuss the similarities and differences in reporting trading securities, available-for-sale securities, and held-tomaturity securities. ANSWER:

Both trading securities and available-for-sale securities are reported at fair value on the balance sheet date. Held-to-maturity securities are reported at amortized cost. Unrealized gains and losses on trading securities are reported on the income statement as part of other income or loss. Unrealized gains and losses on available-for-sale securities are reported in the Stockholders' equity section of the balance sheet. Unrealized gains and losses are not calculated or reported on heldto-maturity securities.

Trading securities are always reported as current assets. Available-for-sale and held-to-maturity securities may be reported as current or noncurrent assets. The classification for available-for-sale securities depends on management intent. The classification for held-to-maturity securities depends on the remaining time to maturity. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

Page 93

Chapter 15 - Investments and Fair Value Accounting 163. On January 1, the valuation allowance for available-for-sale investments account had a zero balance. On December 31, the cost of the available-for-sale securities was $48,700, and the fair value was $39,200. Prepare the adjusting entry to record the unrealized gain or loss for available-for-sale investments on December 31. Dec. Unrealized Gain (Loss) on Available-for-Sale 31 Investments Valuation Allowance for Available-for-Sale Investments *Available-for-sale investments at fair value, December 31

ANSWER:

Available-for-sale investments at cost, December 31 Unrealized gain (loss) on available-forsale investments, December 31

9,500* 9,500 $39,200 48,700 $(9,500)

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:20 PM 164. The cost and fair value of the trading securities held by Lindy Company as of December 31 are as follows:

Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Fair Number Cost Value Total of per per Cost Shares Share Share 1,200 $10.50 $11.05 600 9.00 9.85 900 4.10 4.00 1,400 7.35 6.82

Total Fair Value

(a) Complete the table above to find the total cost and fair value for the company’s trading securities portfolio. (b) Calculate and record the required December 31 adjustment. (c) Explain how the adjustment from part (b) is reported on Lindy’s financial statements.

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Chapter 15 - Investments and Fair Value Accounting (a)

Name

ANSWER:

Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Fair Number Cost Value Total of per Total Fair per Shares Share Share Cost Value 1,200 $10.50 $11.05 $12,600 $13,260 600 9.00 9.85 5,400 5,910 900 4.10 4.00 3,690 3,600 1,400 7.35 6.82 10,290 9,548 $31,980 $32,318

(b) Valuation Allowance for Trading Investments

338

Unrealized Gain on Trading Investments

338

$32,318 – $31,980 = $338 unrealized gain (c) The unrealized gain will be reported on the income statement as other income. The valuation allowance will be added to the cost of investments and be reported under current assets.

POINTS: DIFFICULTY:

Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Number of Cost Fair Value Total Shares per Share per Share Total Cost Fair Value 1,200 $15.00 $15.40 800 8.00 8.25 700 14.40 13.50 900 12.35 10.77

(a) Complete the table above to find the total cost and fair value for the company’s available-for-sale securities portfolio. Copyright Cengage Learning. Powered by Cognero.

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Chapter 15 - Investments and Fair Value Accounting (b) Calculate and record the required December 31 adjustment. (c) Explain how the adjustment from part (b) is reported on Lindy’s financial statements. (a)

Name

ANSWER:

Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Fair Number Cost Value Total of per Total Fair per Shares Share Share Cost Value 1,200 $15.00 $15.40 $18,000 $18,480 800 8.00 8.25 6,400 6,600 700 14.40 13.50 10,080 9,450 900 12.35 10.77 11,115 9,693 $45,595 $44,223

(b) Unrealized Gain (Loss) on Available-for-Sale Investments Valuation Allowance for Available-for-Sale Investments $45,595 – $44,223 = $1,372 unrealized loss

1,372 1,372

(c) The unrealized loss will be shown as a reduction in stockholders’ equity and the valuation allowance will be shown as a reduction of the value of the available-forsale investment portfolio (at cost).

POINTS: DIFFICULTY:

Page 96

Chapter 15 - Investments and Fair Value Accounting 166. On April 1, ValueTime, Inc. had a market price per common share of $24. For the previous year, ValueTime paid a dividend of $1.50 per share. Compute the dividend yield for ValueTime, Inc. ANSWER:

Dividend Yield =

Dividends per Share of Common Stock = $1.50 = 6.25% Market Price per Share of Common Stock $24 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:23 PM 167. Nicer Corporation reported net income of $50,000 in the current year. There are 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 par common stock outstanding. During the year, Nicer paid the preferred stockholders a $6-per-share dividend and also paid $30,000 to common shareholders. The market value of Nicer’s stock is preferred stock, $95, and common stock, $5. (a) Calculate Nicer’s dividend yield common stock. (b) Why does the dividend yield vary widely across firms? ANSWER:

(a) Dividend Yield = $0.60*/$5.00 = 12% * $30,000/50,000 = $0.60 per share common stock dividend

(b) Growth firms tend to retain their earnings to fund future growth, resulting in a small dividend yield. Other companies regularly pay dividends to stockholders resulting in larger dividend yields. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM Copyright Cengage Learning. Powered by Cognero.

Page 97

Chapter 15 - Investments and Fair Value Accounting 168. Gerardo Company had a net income of $75,000 and other comprehensive income of $12,500 for the year. On January 1, the retained earnings balance was $525,000 and the accumulated other comprehensive income balance was $55,000. Determine the (a) comprehensive income for the year, (b) retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. (a) $87,500 ($75,000 + $12,500) (b) $600,000 ($525,000 + $75,000) (c) $67,500 ($55,000 + $12,500) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM ANSWER:

169. Herberto Company had a net income of $74,000 and other comprehensive loss of $8,500 for the year. On January 1, the retained earnings balance was $425,000, and the accumulated other comprehensive income balance was $52,000. Determine the (a) comprehensive income for the year, (b) retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. (a) $65,500 ($74,000 – $8,500) (b) $499,000 ($425,000 + $74,000) (c) $43,500 ($52,000 – $8,500) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM ANSWER:

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Chapter 15 - Investments and Fair Value Accounting 170. LM, Inc. reported net income for the year ending December 31 of $483,500. Dividends paid during the year totaled $52,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $181,000 at the end of the year. It also holds trading securities with an original cost of $150,000 and a fair value of $147,000. Retained earnings on January 1 was $736,400, and accumulated other comprehensive income on January 1 was $16,200. Calculate the following balances to be reported in the financial statements dated December 31: (a) Valuation allowance for available-for-sale securities (b) Comprehensive income (c) Retained earnings (d) Accumulated other comprehensive income ANSWER:

(a) Valuation adjustment for available-for-sale securities: $181,000 – $162,000 = $19,000 (b) Comprehensive income: $483,500 + $19,000 = $502,500 (c) Retained earnings: $736,400 + $483,500 – $52,900 = $1,167,000

(d) Accumulated other comprehensive income: $16,200 + $19,000 = $35,200 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:28 AM

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Chapter 15 - Investments and Fair Value Accounting 171. (a) What is comprehensive income? (b) How is it calculated? (c) What are some examples of items included in other comprehensive income? (d) Where is comprehensive income reported? ANSWER:

(a) Comprehensive income is all changes in stockholders’ equity during a period except those resulting from dividends and stockholders’ investments. (b) It is calculated by adding other comprehensive income to net income. (c) Other comprehensive income items include unrealized gains and losses on available-for-sale-securities and foreign currency and pension liability adjustments.

(d) Comprehensive income is reported in the financial statements in one of the following ways: 1. On the income statement 2. In a separate statement of comprehensive income POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 10:23 PM

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Chapter 16 - Statement of Cash Flows True / False 1. The statement of cash flows is not one of the basic financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 2. Cash, as the term is used for the statement of cash flows, could indicate either cash or cash equivalents. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 16 - Statement of Cash Flows 3. The statement of cash flows is an optional financial statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 4. The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 16 - Statement of Cash Flows 5. The statement of cash flows reports a firm's major sources of cash receipts and major uses of cash for a period of time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 6. Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 16 - Statement of Cash Flows 7. To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 8. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the sale of land. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 16 - Statement of Cash Flows 9. Cash flows from financing activities, as part of the statement of cash flows, would include any payments for dividends. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 10. Cash flows from investing activities, as part of the statement of cash flows, would include any payments for the purchase of treasury stock. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 16 - Statement of Cash Flows 11. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the issuance of bonds payable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 12. There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 16 - Statement of Cash Flows 13. The direct method of preparing the operating activities section of the statement of cash flows reports major classes of cash receipts and cash payments related to the day-to-day operations of the business. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 14. Under the direct method of reporting cash flows from operations, the primary source of cash is cash received from customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 16 - Statement of Cash Flows 15. The main disadvantage of the direct method of reporting cash flows from operating activities is that the necessary data are often costly to accumulate. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 16. A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is emphasized. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 16 - Statement of Cash Flows 17. Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 18. Cash flows from investing activities, as part of the statement of cash flows, include payments for the acquisition of fixed assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 16 - Statement of Cash Flows 19. The acquisition of land in exchange for common stock is an example of a noncash investing and financing activity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:36 PM 20. If a business issued bonds payable in exchange for land, the transaction would be reported in a separate schedule on the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 21. In preparing the statement of cash flows, the correct order of reporting cash activities is financing, operating, and investing. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 22. A cash flow per share amount should be reported on the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 23. Rarely will the cash flows from operating activities, as reported on the statement of cash flows, be the same as the net income reported on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 24. Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 12

Chapter 16 - Statement of Cash Flows 25. If land costing $145,000 was sold for $205,000, the $60,000 gain on the sale would be added to net income in the operating activities section of the statement of cash flows (prepared by the indirect method). a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 26. In preparing the Cash flows from operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 16 - Statement of Cash Flows 27. In determining the cash flows from operating activities for the statement of cash flows by the indirect method, the depreciation expense for the period is added to the net income for the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 28. In preparing the Cash flows from operating activities section of the statement of cash flows by the indirect method, the amortization of bond discount for the period is deducted from the net income for the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 16 - Statement of Cash Flows 29. If cash dividends of $135,000 were paid during the year and the company sold 1,000 shares of common stock at $30 per share, the statement of cash flows would report net cash flow from financing activities as $165,000. a. True b. False ANSWER: RATIONALE:

False Net Cash Flow from Financing Activities = Cash Received from Sale of Common Stock – Cash Paid for Dividends = (1,000 × $30) – $135,000 = ($105,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 30. The declaration and issuance of a stock dividend would be reported on the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 15

Chapter 16 - Statement of Cash Flows 31. If 800 shares of $40 par common stock are sold for $43,000, the $43,000 would be reported in the Cash flows from financing activities section of the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:40 PM 32. If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the Cash flows from financing activities section of the statement of cash flows. a. True b. False ANSWER: RATIONALE:

False Net Cash Flows from Financing Activities = Par Value of Bonds × (101/100) = $475,000 × (101/100) = $479,750 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:40 PM

Page 16

Chapter 16 - Statement of Cash Flows 33. Net income was $51,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash flow from operations is $37,000. a. True b. False ANSWER: RATIONALE:

False Cash Flow from Operations = Net Income + Depreciation Expense = $51,000 + $14,000 = $65,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 34. Net income for the year was $29,500. Accounts receivable increased $2,500, and accounts payable increased $5,400. There were no other changes in noncash current assets and liabilities. Under the indirect method, the cash flow from operations is $32,400. a. True b. False ANSWER: RATIONALE:

True Cash Flow from Operations = Net Income – Increase in Accounts Receivable + Increase in Accounts Payable = $29,500 – $2,500 + $5,400 = $32,400 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:46 PM

Page 17

Chapter 16 - Statement of Cash Flows 35. A building with a cost of $153,000 and accumulated depreciation of $42,000 was sold for an $11,000 gain. When using the indirect method, the cash generated from this investing activity is $121,000. a. True b. False ANSWER: RATIONALE:

False Cash Generated from Investing Activity = Book Value of Building + Gain on Sale of Building = ($153,000 – $42,000) + $11,000 = $122,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:47 PM 36. Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 18

Chapter 16 - Statement of Cash Flows 37. Cash paid to acquire treasury stock should be shown on the statement of cash flows under investing activities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 38. Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 19

Chapter 16 - Statement of Cash Flows 39. Purchasing equipment by issuing a six-month note should be shown on the statement of cash flows under the investing activities section. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 40. Cash inflows and outflows are not netted in the investing or financing sections of the statement of cash flows but are separately disclosed to give the reader full information. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 20

Chapter 16 - Statement of Cash Flows 41. There is no difference in the investing and financing sections of the statement of cash flows using the indirect and direct methods. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:49 PM 42. Under the direct method of preparing a statement of cash flows, the gain on the sale of land is not adjusted or reported as part of cash flows from operating activities. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 43. The manner of reporting cash flows from investing and financing activities will be different under the direct method as compared to the indirect method. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 44. Sales reported on the income statement were $372,000. The accounts receivable balance declined $4,500 over the year. The amount of cash received from customers was $367,500. a. True b. False ANSWER: RATIONALE:

False Cash Received from Customers = Sales + Decrease in Accounts Receivable = $372,000 + $4,500 = $376,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 22

Chapter 16 - Statement of Cash Flows 45. To determine cash payments for merchandise for the statement of cash flows using the direct method, a decrease in accounts payable is added to the cost of merchandise sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 46. To determine cash payments for operating expenses for the statement of cash flows using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 23

Chapter 16 - Statement of Cash Flows 47. To determine cash payments for operating expenses for the statement of cash flows using the direct method, a decrease in accrued expenses is added to operating expenses payable other than depreciation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Bloom's: Understanding Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 48. To determine cash payments for income taxes for the statement of cash flows using the direct method, an increase in income taxes payable is added to the income tax expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 24

Chapter 16 - Statement of Cash Flows 49. Free cash flow is cash flow from operations less cash used to purchase fixed assets to maintain productive capacity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 50. Free cash flow is the measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 51. When using the spreadsheet (work sheet) method to analyzing noncash accounts, no order of analysis is required, but it is more efficient to start with Retained Earnings and proceed upward in the account listing. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM Multiple Choice 52. Which of the following is not one of the four basic financial statements? a. balance sheet b. statement of cash flows c. statement of changes in financial position d. income statement ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 26

Chapter 16 - Statement of Cash Flows 53. Which of the following can be found on the statement of cash flows? a. cash flows from operating activities b. total assets c. total changes in stockholders' equity d. changes in retained earnings ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 54. On the statement of cash flows, the Cash flows from operating activities section would include a. receipts from the issuance of capital stock b. receipts from the sale of investments c. payments for the acquisition of investments d. cash receipts from sales activities ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:50 PM

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Chapter 16 - Statement of Cash Flows 55. Preferred stock issued in exchange for land would be reported on the statement of cash flows in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:51 PM 56. Cash paid to purchase long-term investments would be reported on the statement of cash flows in a. the Cash flows from operating activities section b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. a separate schedule ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 57. Which of the following would not be found in a schedule of noncash investing and financing activities, reported at the end of a statement of cash flows? a. equipment acquired in exchange for a note payable b. bonds payable exchanged for capital stock c. purchase of treasury stock d. capital stock issued to acquire fixed assets ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 58. Which of the following does not represent an outflow of cash and therefore would not be reported on the statement of cash flows as a use of cash? a. purchase of noncurrent assets b. purchase of treasury stock c. discarding an asset that had been fully depreciated d. payment of cash dividends ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 59. Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows? a. retirement of bond payable b. acquisition of treasury stock c. declaration of stock dividends d. issuance of long-term debt ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 60. A 10-year bond was issued at par for $250,000 cash. This transaction should be shown on a statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 61. Cash paid for preferred stock dividends should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 62. The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports a. the increase or decrease in cash b. cash at the end of the year c. net cash flow from investing activities d. net cash flow from financing activities ANSWER: POINTS: DIFFICULTY:

Page 31

Chapter 16 - Statement of Cash Flows 63. Which of the following is a noncash investing and financing activity? a. payment of a cash dividend b. payment of a six-month note payable c. purchase of merchandise inventory on account d. issuance of common stock to acquire land ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 64. Which of the following should be shown on a statement of cash flows under the financing activities section? a. the purchase of a long-term investment in the common stock of another company b. the payment of cash to retire a long-term note c. the proceeds from the sale of a building d. the issuance of a long-term note to acquire land ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 65. A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 66. Cash flow per share is a. required to be reported on the balance sheet b. required to be reported on the income statement c. required to be reported on the statement of cash flows d. not required to be reported on any statement ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 33

Chapter 16 - Statement of Cash Flows 67. On the statement of cash flows prepared by the indirect method, the Cash flows from operating activities section would include a. receipts from the sale of investments b. gains or losses on fixed assets c. payments for cash dividends d. receipts from the issuance of capital stock ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:53 PM 68. The statement of cash flows is not useful for a. planning future investing and financing activities b. determining a company’s ability to pay its debts c. determining a company’s ability to pay dividends d. calculating the net worth of a company ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 69. Cash receipts received from the issuance of a mortgage notes payable would be classified as a(n) a. investing activity b. operating activity c. noncash investing and financing activity d. financing activity ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 70. Which of the following would not be on the statement of cash flows? a. cash flows from investing activities b. cash flows from financing activities c. cash flows from operating activities d. cash flows from contingent activities ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 71. The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing b. operating, financing, and investing c. financing, operating, and investing d. financing, investing, and operating ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 72. Financing activities include a. lending money b. acquiring investments c. issuing debt d. acquiring long-lived assets ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 73. Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:53 PM 74. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. an increase in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 75. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method? a. depreciation expense b. gain on sale of land c. a loss on the sale of equipment d. dividends declared and paid ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 76. Which of the following increases cash? a. depreciation expense b. acquisition of treasury stock c. borrowing money by issuing a six-month note d. the declaration of a cash dividend ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 77. Which of the following would not be classified as an operating activity? a. interest expense b. income taxes c. payment of dividends d. selling expenses ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 78. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. a gain on the sale of land b. a decrease in accounts payable c. an increase in accrued liabilities d. dividends paid on common stock ANSWER: POINTS: DIFFICULTY:

Page 39

Chapter 16 - Statement of Cash Flows 79. On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be a. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities b. added to net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 80. Accounts receivable from sales transactions were $51,000 at the beginning of the year and $64,000 at the end of the year. Net income reported on the income statement for the year was $105,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method would be a. $105,000 b. $118,000 c. $92,000 d. $169,000 ANSWER: RATIONALE:

c Cash Flows from Operating Activities = Net Income – Increase in Accounts Receivable = $105,000 – ($64,000 – $51,000) = $92,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:54 PM

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Chapter 16 - Statement of Cash Flows 81. The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:

Cash Accounts Receivable Inventories Prepaid Expenses Accounts Payable (merchandise creditors)

End $50,000 112,000 105,000 4,500 75,000

Beginning $60,000 108,000 93,000 6,500 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $198,000 b. $324,000 c. $352,000 d. $296,000 ANSWER:

RATIONALE:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Amortization of patents Changes in current operating assets and liabilities: Increase in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Net cash flow from operating activities

$275,000

40,000 9,000

(4,000) (12,000) 2,000 (14,000) $296,000

POINTS: DIFFICULTY:

1 Moderate Bloom’s: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:55 PM

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Chapter 16 - Statement of Cash Flows 82. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable

$175,000 28,000 16,000 21,000

The net cash flow from operating activities using the indirect method is a. $166,000 b. $184,000 c. $110,000 d. $240,000 ANSWER:

RATIONALE:

Cash flows from operating activities: Net income $175,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 28,000 Changes in current operating assets and liabilities: Increase in accounts receivable (16,000) Decrease in accounts payable (21,000) Net cash flow from operating activities $166,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 83. On the statement of cash flows, the Cash flows from investing activities section would include a. receipts from the issuance of capital stock b. payments for dividends c. payments for retirement of bonds payable d. receipts from the sale of investments ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:00 PM 84. A building with a book value of $54,000 is sold for $63,000 cash. Using the indirect method, this transaction should be shown on the statement of cash flows as an increase of a. $54,000 from investing activities b. $63,000 from investing activities and a deduction from net income of $9,000 c. $9,000 from investing activities d. $54,000 from investing activities and an addition to net income of $9,000 ANSWER: RATIONALE:

b Gain on Sale of Building = $63,000 – $54,000 = $9,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:01 PM

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Chapter 16 - Statement of Cash Flows 85. Cash paid for equipment would be reported on the statement of cash flows in a. the Cash flows from operating activities section b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. a separate schedule ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:02 PM 86. If a gain of $11,000 is realized in selling (for cash) office equipment having a book value of $55,000, the total amount reported in the Cash flows from investing activities section of the statement of cash flows is a. $44,000 b. $11,000 c. $55,000 d. $66,000 ANSWER: RATIONALE:

d Cash Flow from Sale of Office Equipment (to be reported as an investing activity) = Book Value of Office Equipment + Gain on Sale of Office Equipment = $55,000 + $11,000 = $66,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:02 PM

Page 45

Chapter 16 - Statement of Cash Flows 87. Which of the following types of transactions would be reported as a cash flow from investing activity on the statement of cash flows? a. issuance of bonds payable b. issuance of capital stock c. purchase of treasury stock d. purchase of noncurrent assets ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 88. Land costing $140,000 was sold for $173,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $173,000 b. $140,000 c. $313,000 d. $33,000 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 46

Chapter 16 - Statement of Cash Flows 89. Equipment with an original cost of $75,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000. As a result of this transaction, cash would a. increase by $48,000 b. decrease by $7,000 c. increase by $55,000 d. decrease by $27,000 ANSWER: RATIONALE:

a Increase in Cash = Book Value of Equipment + Loss on Sale of Equipment = ($75,000 – $20,000) – $7,000 = $48,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 90. On the statement of cash flows, the Cash flows from financing activities section would include a. receipts from the sale of investments b. payments for the acquisition of investments c. receipts from a note receivable d. receipts from the issuance of capital stock ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 91. Cash dividends paid on capital stock would be reported in the statement of cash flows in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:05 PM 92. Cash dividends of $45,000 were declared during the year. Cash dividends payable were $10,000 at the beginning of the year and $15,000 at the end of the year. The amount of cash for the payment of dividends during the year is a. $50,000 b. $40,000 c. $55,000 d. $35,000 ANSWER: RATIONALE:

b Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $10,000 + $45,000 – $15,000 = $40,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 93. On the statement of cash flows prepared using the indirect method, a $7,500 gain on the sale of fixed assets would be a. added to net income in converting the net income reported on the income statement to cash flows from operating activities b. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 4:06 PM 94. A business issues 20-year bonds payable in exchange for preferred stock. This transaction would be reported on the statement of cash flows in a. a separate schedule b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. the Cash flows from operating activities section ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 95. Land costing $71,000 was sold for $50,000 cash. The loss on the sale was reported on the income statement as other expense. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $50,000 b. $71,000 c. $121,000 d. $21,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 96. The current period statement of cash flows includes the following: Cash balance at the beginning of the period Net cash flow from operating activities Net cash flow used for investing activities Net cash flow used for financing activities

$310,000 185,000 43,000 97,000

The cash balance at the end of the period is a. $45,000 b. $635,000 c. $355,000 d. $125,000 ANSWER: RATIONALE:

c Cash Balance at End of Period = $310,000 + $185,000 – $43,000 – $97,000 = $355,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 97. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method? a. a decrease in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 98. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. depreciation expense b. an increase in inventory c. a gain on the sale of equipment d. dividends declared and paid ANSWER: POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 99. The net income reported on the income statement for the current year was $250,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000, and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows:

Cash Accounts Receivable Inventories Prepaid Expenses Accounts Payable (merchandise creditors)

End $ 50,000 112,000 105,000 4,500 75,000

Beginning $ 60,000 108,000 93,000 6,500 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $271,000 b. $279,000 c. $327,000 d. $256,000 ANSWER:

RATIONALE:

$250,000

40,000 9,000

(4,000) (12,000) 2,000 (14,000) $271,000

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 100. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable

$165,000 28,000 16,000 21,000

The net cash flow from operating activities using the indirect method is a. $230,000 b. $188,000 c. $198,000 d. $156,000 ANSWER:

RATIONALE:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in accounts payable Net cash flow from operating activities

$165,000

28,000

(16,000) (21,000) $156,000

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 101. Cash dividends of $50,000 were declared during the year. Cash dividends payable were $10,000 and $5,000 at the beginning and end of the year, respectively. The amount of cash for the payment of dividends during the year is a. $55,000 b. $50,000 c. $65,000 d. $60,000 ANSWER: RATIONALE:

a Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $10,000 + $50,000 – $5,000 = $55,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 102. Accounts receivable from sales to customers amounted to $40,000 and $32,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $110,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $118,000 b. $110,000 c. $102,000 d. $150,000 ANSWER: RATIONALE:

a Cash Flows from Operations = Net Income + Decrease in Accounts Receivable = $110,000 + ($40,000 – $32,000) = $118,000

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 103. Baxter Company reported a net loss of $13,000 for the year ended December 31. During the year, accounts receivable decreased by $5,000, merchandise inventory increased by $8,000, accounts payable increased by $10,000, and depreciation expense of $4,000 was recorded. During the year, operating activities under the indirect method a. provided net cash of $8,000 b. provided net cash of $2,000 c. used net cash of $8,000 d. used net cash of $2,000 ANSWER: RATIONALE:

d Net income $(13,000) Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 4,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 5,000 Increase in merchandise inventory (8,000) Increase in accounts payable 10,000 Net cash flow used in operating activities $(2,000)

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 104. A company had net income of $252,000. Depreciation expense was $26,000. During the year, accounts receivable and inventory increased by $15,000 and $40,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much was the net cash flow from operating activities on the statement of cash flows using the indirect method? a. $217,000 b. $224,000 c. $284,000 d. $305,000 ANSWER:

RATIONALE:

Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense Loss on sale of equipment Changes in current operating assets and liabilities: Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Net cash flow used in operating activities

$252,000

26,000 3,000

(15,000) (40,000) 2,000 (4,000) $224,000

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 105. Zenith Corporation sells some of its used store fixtures. The acquisition cost of the fixtures is $12,500, and the accumulated depreciation on these fixtures is $9,750 at the time of sale. The fixtures are sold for $5,300. The value of this transaction in the investing section of the statement of cash flows is a. $12,500 b. $5,300 c. $2,750 d. $2,550 ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 8:00 PM 106. Norris Company declared cash dividends of $60,000 during the year. Cash dividends payable were $20,000 at the beginning of the year and $25,000 at the end of the year. The amount of cash Norris Company used for payment of dividends during the year was a. $55,000 b. $80,000 c. $105,000 d. $65,000 ANSWER: RATIONALE:

a Cash Used for Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $20,000 + $60,000 – $25,000 = $55,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:43 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16 - Statement of Cash Flows 107. A corporation uses the indirect method for preparing the statement of cash flows. A fixed asset has been sold for $25,000 representing a gain of $4,500. The value in the operating activities section regarding this event would be a. $25,000 b. $(4,500) c. $29,500 d. $4,500 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 108. Accounts receivable resulting from sales to customers amounted to $40,000 and $31,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $120,000 b. $129,000 c. $151,000 d. $111,000 ANSWER: RATIONALE:

b Cash Flows from Operations = Net Income + Decrease in Accounts Receivable = $120,000 + ($40,000 – $31,000) = $129,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 109. If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis b. expenses on an accrual basis are less than expenses on a cash basis c. expenses on an accrual basis are the same as expenses on a cash basis d. expenses on an accrual basis are greater than expenses on a cash basis ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 110. Changes in current assets and current liabilities are reported on the statement of cash flows, using the indirect method, in the a. operating activities b. financing activities c. investing activities d. separate schedule of noncash activities ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:44 AM

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Chapter 16 - Statement of Cash Flows 111. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income b. deducted from net income c. ignored because it does not affect cash d. reported supplementally as a noncash investing and financing activity ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 112. Net income for the year was $45,500. Accounts receivable increased by $5,500, and accounts payable increased by $11,200. Under the indirect method, the cash flow from operations is a. $51,200 b. $45,500 c. $62,200 d. $28,800 ANSWER: RATIONALE:

a Cash Flows from Operations = Net Income – Increase in Accounts Receivable + Increase in Accounts Payable = $45,500 – $5,500 + $11,200 = $51,200 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:44 AM

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Chapter 16 - Statement of Cash Flows 113. Rogers Company reported net income of $35,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000, and depreciation expense of $8,000 was recorded. Net cash provided by operating activities under the indirect method for the year is a. $53,000 b. $47,000 c. $33,000 d. $37,000 ANSWER:

RATIONALE:

$35,000

8,000

(7,000) (3,000) $33,000

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 114. On the statement of cash flows, the Cash flows from financing activities section would include all of the following except a. receipts from the sale of bonds payable b. payments for dividends c. payments for purchase of treasury stock d. payments of interest on bonds payable ANSWER: POINTS: DIFFICULTY:

d 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 8:05 PM 115. On the statement of cash flows, the Cash flows from operating activities section would include a. receipts from the issuance of capital stock b. payment for interest on short-term notes payable c. payments for the purchase of investments d. payments for cash dividends ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 8:06 PM

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Chapter 16 - Statement of Cash Flows 116. Firefly Inc. sold land for $225,000 cash. The land had been purchased five years earlier for $275,000. The loss on the sale was reported on the income statement. On the statement of cash flows, what amount should Firefly report as an investing activity from the sale of the land? a. $225,000 b. $275,000 c. $50,000 d. $500,000 ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:45 AM

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Chapter 16 - Statement of Cash Flows 117. The cost of merchandise sold during the year was $50,000. Merchandise inventories were $12,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $6,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $49,000 b. $47,000 c. $51,000 d. $53,000 ANSWER: RATIONALE:

a Purchases during Year = Ending Inventory + Cost of Merchandise Sold during Year – Beginning Inventory = $10,500 + $50,000 – $12,500 = $48,000 Cash Payments for Merchandise = Beginning Accounts Payable + Purchases during Year – Ending Accounts Payable = $6,000 + $48,000 – $5,000 = $49,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 118. Sales for the year were $600,000. Accounts receivable were $100,000 and $80,000 at the beginning and end of the year, respectively. Cash received from customers to be reported on the statement of cash flows using the direct method is a. $700,000 b. $600,000 c. $580,000 d. $620,000 ANSWER: RATIONALE:

d Cash Received from Customers = Beginning Accounts Receivable + Sales – Ending Accounts Receivable = $100,000 + $600,000 – $80,000 = $620,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows Use the information below for Washington Company to answer the following questions. The following selected account balances appeared on the financial statements of Washington Company: Accounts Receivable, January 1 Accounts Receivable, December 31 Accounts Payable, January 1 Accounts Payable, December 31 Merchandise Inventory, January 1 Merchandise Inventory, December 31 Sales Cost of Merchandise Sold

$13,000 9,000 4,000 7,000 10,000 15,000 56,000 31,000

Washington Company uses the direct method to calculate net cash flow from operating activities. 119. Cash collections from customers were a. $56,000 b. $52,000 c. $60,000 d. $45,000 ANSWER: RATIONALE:

c Cash Collection from Customers = Accounts Receivable on January 1 + Sales – Accounts Receivable on December 31 = $13,000 + $56,000 – $9,000 = $60,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Washington Company LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 120. Cash payments for merchandise were a. $39,000 b. $33,000 c. $29,000 d. $23,000 ANSWER: RATIONALE:

b Purchases during Year = Inventory on December 31 + Cost of Merchandise Sold during Year – Inventory on January 1 = $15,000 + $31,000 – $10,000 = $36,000 Cash Payments for Merchandise = Accounts Payable on January 1 + Purchases – Accounts Payable on December 31 = $4,000 + $36,000 – $7,000 = $33,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Washington Company LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 121. Income tax was $175,000 for the year. Income tax payable was $30,000 and $40,000 at the beginning and end of the year, respectively. Cash payments for income tax reported on the statement of cash flows using the direct method is a. $175,000 b. $165,000 c. $205,000 d. $215,000 ANSWER: RATIONALE:

b Cash Payments for Income Tax = Beginning Income Tax Payable + Income Tax Expense for Year – Ending Income Tax Payable = $30,000 + $175,000 – $40,000 = $165,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

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Chapter 16 - Statement of Cash Flows 122. The cost of merchandise sold during the year was $45,000. Merchandise inventories were $13,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $7,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $46,000 b. $44,000 c. $50,000 d. $40,000 ANSWER: RATIONALE:

b Purchases during Year = Ending Inventory + Cost of Merchandise Sold during Year – Beginning Inventory = $10,500 + $45,000 – $13,500 = $42,000 Cash Payments for Merchandise = Beginning Accounts Payable + Purchases during Year – Ending Accounts Payable = $7,000 + $42,000 – $5,000 = $44,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 71

Chapter 16 - Statement of Cash Flows 123. Free cash flow is a. all cash in the bank b. cash from operations c. cash from financing less cash used to purchase fixed assets to maintain productive capacity and cash used for dividends d. cash flow from operations less cash used to purchase fixed assets to maintain productive capacity ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM 124. Free cash flow is cash flow from operations less cash used for a. investments in PP&E needed to maintain current production b. dividends and cash to redeem bonds payable c. investments in PP&E needed to achieve desired future production d. fixed assets needed to maintain productivity and cash to redeem bonds payable ANSWER: POINTS: DIFFICULTY:

Page 72

Chapter 16 - Statement of Cash Flows 125. The operating cash flow available for company use after purchasing the fixed assets that are necessary to maintain current productive capacity is called the a. free cash flow b. modified cash flow c. PPE cash flow d. restricted cash flow ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:46 AM 126. When using the spreadsheet (work sheet) method to analyze noncash accounts, it is best to start with a. cash b. net income c. retained earnings d. revenue ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:46 AM

Page 73

Chapter 16 - Statement of Cash Flows 127. When using the spreadsheet (work sheet) for the statement of cash flows, under the indirect method, entries made on the spreadsheet are a. not recorded in the journal or posted to the ledger b. recorded in the journal and posted to the ledger c. recorded in the journal but not posted to the ledger d. not recorded in to the journal but are posted to the ledger ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:47 AM Matching For each of the following activities that may take place during the accounting period, indicate the effect (a– g) on the statement of cash flows prepared using the indirect method. Choices may be selected as the answer for more than one question. a. Increase cash from operating activities b. Decrease cash from operating activities c. Increase cash from investing activities d. Decrease cash from investing activities e. Increase cash from financing activities f. Decrease cash from financing activities g. Noncash investing and financing supplement DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:37 AM

Page 74

Chapter 16 - Statement of Cash Flows 128. Purchase of equipment ANSWER: d POINTS: 1 129. Repayment of long-term note payable ANSWER: f POINTS: 1 130. Amortization of intangible assets ANSWER: a POINTS: 1 131. Exchange of land for common stock ANSWER: g POINTS: 1 132. Payment of dividends ANSWER: f POINTS: 1 133. Sale of land ANSWER: c POINTS: 1 134. Gain on sale of investments ANSWER: b POINTS: 1 135. Acquisition of treasury stock ANSWER: f POINTS: 1 136. Increase in accounts receivable balance ANSWER: b POINTS: 1 137. Decrease in accounts payable balance ANSWER: b POINTS: 1 Identify the section of the statement of cash flows (a–d) where each of the following items would be reported. a. Operating activities b. Financing activities c. Investing activities d. Schedule of noncash financing and investing Copyright Cengage Learning. Powered by Cognero.

Page 75

Chapter 16 - Statement of Cash Flows DIFFICULTY:

Bloom's: Remembering Easy QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:38 AM 138. Increase in income taxes payable ANSWER: a POINTS: 1 139. Amortization of patent ANSWER: a POINTS: 1 140. Sale of machinery held for use by the company ANSWER: c POINTS: 1 141. Issuance of bond payable ANSWER: b POINTS: 1 142. Purchase of the stock of another company as investment ANSWER: c POINTS: 1 143. Decrease in inventory ANSWER: a POINTS: 1 144. Exchange of land for note payable ANSWER: d POINTS: 1 145. Payment of dividends to stockholders ANSWER: b POINTS: 1

Page 76

Chapter 16 - Statement of Cash Flows 146. Increase in accounts receivable ANSWER: a POINTS: 1 147. Loss on sale of equipment ANSWER: a POINTS: 1 Subjective Short Answer 148. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. b. c. d. e. f.

Purchased buildings Sold patents Net income Issued common stock Paid cash dividends Depreciation expense

ANSWER:

a. b. c. d. e. f.

I I O F F O

POINTS: DIFFICULTY:

1 Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:39 AM 149. State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing activities, financing activities, or not reported) and the amount that would be reported for each of the following transactions: (a) (b)

Received $120,000 from the sale of land costing $70,000. Purchased investments for $75,000.

Page 77

Chapter 16 - Statement of Cash Flows (c) (d) (e) (f) (g) (h) (i)

Declared $35,000 cash dividends on stock. $5,000 dividends were payable at the beginning of the year, and $6,000 were payable at the end of the year. Acquired equipment for $64,000 cash. Declared and issued 100 shares of $20 par common stock as a stock dividend, when the market price of the stock was $32 a share. Recognized depreciation for the year, $37,000. Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash. Issued $500,000 of 20-year, 10% bonds payable at 99. Borrowed $43,000 from Regional Bank, issuing a five-year, 8% note for that amount.

(a) ANSWER:

(b) (c)

(d) (e) (f) (g)

(h) (i)

Investing activities, $120,000 (the $50,000 gain on the sale would be deducted from net income in determining the cash flows from operating activities) Investing activities, ($75,000) Financing activities, ($34,000) Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $5,000 + $35,000 – $6,000 = $34,000 Investing activities, ($64,000) Not reported Operating activities, $37,000 (addition to net income in determining cash flows from operating activities) Financing activities, $2,125,000 Cash from Financing Activity = Number of Shares Issued × Issue Price per Share = 85,000 × $25 = $2,125,000 Financing activities, $495,000 Cash from Financing Activities = $500,000 × (99 / 100) = $495,000 Financing activities, $43,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 7:59 PM Copyright Cengage Learning. Powered by Cognero.

Page 78

Chapter 16 - Statement of Cash Flows 150. Identify which section of the statement of cash flows (using the indirect method) would present information regarding the following activities. (Use O for operating, I for investing, or F for financing.) a. Issued common stock b. Redeemed bonds c. Issued preferred stock d. Purchased patents e. Net income f. Paid cash dividends g. Purchased treasury stock h. Sold long-term investment i. Sold equipment j. Purchased buildings k. Issued bonds ANSWER:

a. F b. F c. F d. I e. O f. F g. F h. I i. I j. I k. F POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:48 AM

Page 79

Chapter 16 - Statement of Cash Flows 151. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. Purchased treasury stock b. Sold equipment at book value c. Net income d. Sold long-term investments e. Issued common stock f. Depreciation expense ANSWER:

a. b. c. d. e. f.

F I O I F O

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:48 AM 152. The net income reported on the income statement for the current year was $210,000. Depreciation recorded on equipment and a building amount to $62,500 for the year. Balances of the current assets and current liabilities accounts at the beginning and end of the year are as follows:

Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Salaries Payable

(a) (b)

End of Year Beginning of Year $ 56,000 $ 59,500 71,000 73,400 140,000 126,500 7,800 8,400 62,600 66,400 9,000 8,250

Prepare the Cash flows from operating activities section of the statement of cash flows, using the indirect method. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

Page 80

Chapter 16 - Statement of Cash Flows ANSWER:

(a) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Changes in current operating assets and liabilities: Decrease in accounts receivable

$210,000

62,500

2,400 (13,500)

Increase in inventories Decrease in prepaid expenses

600

Decrease in accounts payable

(3,800)

Increase in salaries payable

750

Net cash flow from operating activities

$258,950

(b) Yes. The amount of cash flows from operating activities reported on the statement of cash flows is not affected by the method of reporting such flows. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:49 AM 153. The income statement disclosed the following items for the current year: Depreciation expense Gain on disposal of equipment Net income

$ 36,000 21,000 317,500

Balances of the current assets and current liabilities accounts changed between December 31, last year, and December 31, this year, as follows: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in income taxes payable Copyright Cengage Learning. Powered by Cognero.

$5,600 3,200 1,200 3,800 1,200 Page 81

Chapter 16 - Statement of Cash Flows Increase in dividends payable

850

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Gain on disposal of equipment Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in income taxes payable Net cash flow from operating activities

$317,500

36,000 (21,000)

(5,600) 3,200 1,200 (3,800) 1,200 $328,700

Note: The change in dividends payable would be used to adjust the dividends declared in obtaining the cash paid for dividends in the financing activities section of the statement of cash flows. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:50 AM

Page 82

Chapter 16 - Statement of Cash Flows 154. Indicate whether each of the following would be added to or deducted from net income in determining net cash flow from operating activities by the indirect method: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)

Increase in prepaid expenses Amortization of patents Increase in salaries payable Gain on sale of fixed assets Decrease in accounts receivable Increase in notes receivable due in 60 days Amortization of discount on bonds payable Decrease in merchandise inventory Depreciation of fixed assets Loss on retirement of long-term debt Decrease in accounts payable Increase in notes payable due in 30 days Increase in income taxes payable

(a) deducted (b) added (c) added (d) deducted (e) added (f) deducted (g) added (h) added (i) added (j) added (k) deducted (l) added (m) added POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM ANSWER:

Page 83

Chapter 16 - Statement of Cash Flows 155. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. b. c. d. e. f.

Gain from sale of land Paid dividends Purchased equipment Net income Issued company’s common stock Amortization expense

ANSWER:

a. b. c. d. e. f.

O F I O F O

POINTS: DIFFICULTY:

1 Bloom's: Understanding Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:51 AM

Page 84

Chapter 16 - Statement of Cash Flows 156. Each of the events below may have an effect on the statement of cash flows. Designate how the event should be reported within the statement of cash flows using the codes provided. Codes may be used more than once, or not at all. Codes: I + Investing activity; cash inflow I – Investing activity; cash outflow F + Financing activity; cash inflow F – Financing activity; cash outflow O + Operating activity; cash inflow O – Operating activity; cash outflow NC Noncash investing and financing activity Events: 1. Paid the weekly payroll 2. Paid an account payable 3. Issued bonds payable for cash 4. Declared and paid a cash dividend 5. Paid cash for a new piece of equipment 6. Purchased treasury stock for cash 7. Paid cash for stock in another company 8. Recorded depreciation 9. Received cash for sales 10. Sold a long-term stock investment for cash at book value 1. O– 2. O– 3. F+ 4. F– 5. I– 6. F– 7. I– 8. O+ 9. O+ 10. I+ POINTS: 1 DIFFICULTY: Bloom's: Understanding Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:52 AM ANSWER:

Page 85

Chapter 16 - Statement of Cash Flows 157. Indicate the section (operating activities, investing activities, financing activities, or none) in which each of the following would be reported on the statement of cash flows prepared by the indirect method. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Gain on sale of fixed assets Net income Retirement of long-term debt Sale of capital stock Distribution of stock dividends Payment of cash dividends Purchase of fixed assets Sale of fixed assets Increase in inventory Payment of interest expense

ANSWER:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Operating activities Operating activities Financing activities Financing activities None Financing activities Investing activities Investing activities Operating activities Operating activities

POINTS: DIFFICULTY:

1 Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:53 AM

Page 86

Chapter 16 - Statement of Cash Flows 158. Durrand Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $2,200 between consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,300 from sale of land. The company earned a net income of $65,000. Determine net cash flow from operating activities under the indirect method. ANSWER:

Net income $65,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 12,000 Amortization 2,200 Gain from sale of land (4,300) Net cash flow from operating activities $74,900

POINTS: DIFFICULTY:

Page 87

Chapter 16 - Statement of Cash Flows 159. Fortune Corporation’s comparative balance sheet for current assets and liabilities was as follows: Dec. 31, Year 2 $ 7,500 11,500 4,300 4,000

Accounts receivable Inventory Accounts payable Dividends payable

Dec. 31, Year 1 $ 5,200 16,000 5,200 3,000

Adjust Year 2 net income of $65,000 for changes in operating assets and liabilities to arrive at cash flows from operating activities using the indirect method. ANSWER:

Net income $65,000 Adjustments to reconcile net income to net cash flow from operating activities: Changes in current operating assets and liabilities: Increase in accounts receivable (2,300) Decrease in inventory 4,500 Decrease in accounts payable (900) Net cash flow from operating activities $66,300

POINTS: DIFFICULTY:

Page 88

Chapter 16 - Statement of Cash Flows 160. Kennedy, Inc. reported the following data: Net income Depreciation expense Loss on disposal of equipment Gain on sale of building Increase in accounts receivable Decrease in accounts payable

$118,000 15,000 (10,000) 20,000 7,000 (2,000)

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER:

Cash flows from operating activities: Net income

$118,000

Adjustments to reconcile net income to net cash flow from operating activities: Depreciation

15,000

Loss on disposal of equipment

10,000

Gain on sale of building

(20,000)

Changes in current operating assets and liabilities: Increase in accounts receivable

(7,000)

Decrease in accounts payable

(2,000)

Net cash flow from operating activities

$114,000

POINTS: DIFFICULTY:

Page 89

Chapter 16 - Statement of Cash Flows 161. Lamar Corporation purchased land for $150,000. Later in the year, the company sold land with a book value of $190,000 for $200,000. Show how the effects of these transactions are reported on the statement of cash flows using the indirect method. ANSWER:

Adjustments to reconcile net income to net cash flow from operating activities: Gain on sale of land* $(10,000) Cash flows from investing activities: Cash received for sale of land Cash paid for purchase of land

$200,000 (150,000)

*Gain on Sale of Land = Selling Price – Book Value = $200,000 – $190,000 = $10,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:57 AM

Page 90

Chapter 16 - Statement of Cash Flows 162. Samuel Company’s accumulated depreciation—equipment account increased by $6,000, while patents decreased by $2,200 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a loss of $3,200 from the sale of investments. Assume no changes in noncash current assets and liabilities. Samuel Company reported a net income of $92,000. Determine net cash flow from operating activities using the indirect method. Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Amortization Loss from sale of investments Net cash flow from operating activities POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 7:59 AM ANSWER:

$ 92,000

6,000 2,200 3,200 $103,400

Page 91

Chapter 16 - Statement of Cash Flows 163. Dorman Company reported the following data: Net income Depreciation expense Gain on disposal of equipment Decrease in accounts receivable Decrease in accounts payable

$225,000 25,000 20,500 14,000 3,600

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Gain on disposal of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Decrease in accounts payable Net cash flow from operating activities

$225,000

25,000 (20,500)

14,000 (3,600) $239,900

POINTS: DIFFICULTY:

Page 92

Chapter 16 - Statement of Cash Flows 164. The board of directors declared cash dividends totaling $168,000 during the year. The comparative balance sheet indicated dividends payable of $46,000 at the beginning of the year and $42,000 at the end of the year. What was the amount of cash payments to stockholders during the year? ANSWER:

Dividends declared Add: Decrease in dividends payable Dividends paid to stockholders during the year

$168,000 4,000 $172,000

The company probably had four quarterly payments—the first one being $46,000 declared in the preceding year and three payments of $42,000 each—of dividends declared and paid during the current year. Thus, $172,000 [$46,000 + (3 × $42,000)] is the amount of cash payments to stockholders. The $42,000 of dividends payable at the end of the year will be paid in the first quarter of the next year. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

Page 93

Chapter 16 - Statement of Cash Flows 165. The following two scenarios are independent of one another. (a) An analysis of the general ledger accounts indicates that office equipment was sold for $39,600 during the year. The equipment originally cost $68,000 and had accumulated depreciation of $22,500 on the date of sale. Indicate how the elements of this transaction would be reported on the statement of cash flows using the indirect method. (b) An analysis of the general ledger accounts indicates that delivery equipment, which cost $97,000 and on which accumulated depreciation totaled $42,100 on the date of sale, was sold for $57,500 during the year. Using this information, indicate the items to be reported on the statement of cash flows. ANSWER:

(a) Cash flows from operating activities: Loss on sale of equipment* *Loss on Sale of Equipment = Selling Price – Book Value = $39,600 – ($68,000 – $22,500) = $5,900

$5,900

Cash flows from investing activities: Cash received from sale of equipment

$39,600

(b) Cash flows from operating activities: Gain on sale of equipment*

$(2,600)

*Gain on Sale of Equipment = Selling Price – Book Value of Equipment = $57,500 – ($97,000 – $42,100) = $2,600 Cash flows from investing activities: Cash received from sale of equipment

$57,500

POINTS: DIFFICULTY:

Page 94

Chapter 16 - Statement of Cash Flows 166. On the basis of the details of the common stock account presented below, calculate the total amount to be recorded in the financing section of the statement of cash flows. Assume any stock issues were at par. Indicate whether the amount results in an increase or decrease in cash. Common Stock, $10 Par Balance Date

Item

Debit

Credit

1 Balance, 50,000 shares

—

$500,000

Mar. 7

5,000 shares issued at par for cash

—

$50,000

550,000

Sept. 20

2,500-share stock dividend

—

25,000

575,000

Dec. 10

2,000 shares issued at $20 for cash

—

40,000

615,000

Jan.

Debit

Credit

Cash flows from financing activities: Cash received from sale of common stock POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 8:03 AM ANSWER:

$90,000

Page 95

Chapter 16 - Statement of Cash Flows 167. The net income reported on an income statement for the current year was $63,000. Depreciation recorded on fixed assets for the year was $24,000. Balances of the current asset and current liability accounts at the end and beginning of the year are listed below. Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. End $65,000 70,000 86,000 4,000 51,000 4,500 6,000

Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable

ANSWER:

Beginning $ 70,000 57,000 102,000 4,500 58,000 6,500 7,500

Cash flows from operating activities: Net income

$63,000

Adjustments to reconcile net income to net cash flow from operating activities: Depreciation

24,000

Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses

16,000 500

Increase in accounts receivable (net)

(13,000)

Decrease in accounts payable

(7,000)

Decrease in salaries payable

(1,500)

Net cash flow from operating activities

$82,000

POINTS: DIFFICULTY:

Page 96

Chapter 16 - Statement of Cash Flows 168. The board of directors of Kendall Co. declared cash dividends totaling $390,000 during the current year. The comparative balance sheet indicates dividends payable of $58,000 at the beginning of the year and $73,000 at the end of the year. What was the amount of cash payments Kendall Co. made to stockholders during the year? Dividends declared Less increase in dividends payable Dividends paid to stockholders during the year POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM ANSWER:

$390,000 15,000 $375,000

169. An analysis of the general ledger accounts indicates that equipment, with an original cost of $200,000 and accumulated depreciation of $170,000 on the date of sale, was sold for $20,000 during the year. Using this information, indicate the items to be reported on the statement of cash flows using the indirect method. ANSWER:

Cash flows from operating activities: Loss on sale of equipment* *Loss on Sale of Equipment = Selling Price – Book Value = $20,000 – ($200,000 – $170,000) = $10,000 Cash flows from investing activities: Cash received from sale of equipment

$10,000

$20,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/20/2017 6:03 PM 170. On the basis of the following data for Larson Co. for the year ending December 31 Year 2, and the preceding year ended December 31, Year 1, prepare a statement of cash flows. Use the indirect method of reporting cash flows from operating activities. In addition to the balance sheet data, assume that: Equipment costing $125,000 was purchased for cash. Copyright Cengage Learning. Powered by Cognero.

Page 97

Chapter 16 - Statement of Cash Flows Equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000. The stock was issued for cash. The only entries in the retained earnings account were net income of $51,000 and cash dividends declared of $13,000.

Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation

Accounts payable (merchandise creditors) Cash dividends payable Common stock, $10 par Paid-in capital in excess of par—common stock Retained earnings

Year 2 $100,000 78,000 101,500 410,000 (150,000) $539,500

Year 1 $ 78,000 85,000 90,000 370,000 (158,000) $465,000

$ 58,500 5,000 200,000 62,000 214,000 $539,500

$ 55,000 4,000 170,000 60,000 176,000 $465,000

ANSWER: Larson Co. Statement of Cash Flows For Year Ended December 31, Year 2 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Increase in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from sale of equipment Cash paid for purchase of equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from issuance of common stock Cash paid for dividends Net cash flow from financing activities Increase in cash Copyright Cengage Learning. Powered by Cognero.

$ 51,000

57,000* 5,000

7,000 (11,500) 3,500 $112,000 $ 15,000 (125,000) (110,000)

$ 32,000 ** (12,000) 20,000 $ 22,000 Page 98

Chapter 16 - Statement of Cash Flows Cash at the beginning of the year Cash at the end of the year

78,000 $100,000

*$150,000 – ($158,000 – $65,000) = $57,000 **$13,000 + $4,000 – $5,000 = $12,000

POINTS: DIFFICULTY:

Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment

Accounts Payable Bonds Payable, Due Year 2 Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

Year 2 $ 53,000 37,000 108,500 — 573,200 (142,000) $629,700

Year 1 $ 50,000 48,000 100,000 70,000 450,000 (176,000) $542,000

$ 62,500 — 325,000 80,000 162,200 $629,700

$ 43,800 100,000 285,000 55,000 58,200 $542,000

The income statement for the current year is as follows: Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Income from operations Copyright Cengage Learning. Powered by Cognero.

$625,700 340,000 $285,700 $26,000 68,000

94,000 $191,700 Page 99

Chapter 16 - Statement of Cash Flows Other revenue and expense: Gain on sale of investment Interest expense Income before income tax Income tax Net income

$4,000 (6,000)

(2,000) $189,700 60,700 $129,000

Additional data for the current year are as follows: (a) Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200. (b) Bonds payable for $100,000 were retired by payment at their face amount. (c) 5,000 shares of common stock were issued at $13 for cash. (d) Cash dividends declared and paid, $25,000. Prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities. ANSWER: Posner Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: $129,000 Net income Adjustments to reconcile net income to net cash flow from operating activities: 26,000 Depreciation (4,000) Gain on sale of investment Changes in current operating assets and liabilities: Decrease in accounts 11,000 receivable Increase in accounts 18,700 payable (8,500) Increase in inventories Net cash flow from operating $172,200 activities Cash flows from investing activities: $ 74,000 Cash from sale of investments Cash paid for purchase (183,200) of equipment Net cash flow used for investing (109,200) activities Cash flows from financing activities: Cash from sale of common $ 65,000 stock Cash paid to retire bonds payable (100,000) Copyright Cengage Learning. Powered by Cognero.

Page 100

Chapter 16 - Statement of Cash Flows (25,000)

Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year

(60,000) $ 3,000 50,000 $ 53,000

POINTS: DIFFICULTY:

Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment

Accounts Payable Bonds Payable Common Stock, $20 par Premium on Common Stock Retained Earnings

Year 2 $ 72,000 61,000 121,000 — 515,000 (153,000) $616,000

Year 1 $ 42,500 70,200 105,000 100,000 425,000 (175,000) $567,700

$ 59,750 — 375,000 50,000 131,250 $616,000

$ 47,250 75,000 325,000 25,000 95,450 $567,700

Additional data for the current year are as follows: (a) Net income, $75,800. (b) Depreciation reported on income statement, $38,000. (c) Fully depreciated equipment costing $60,000 was scrapped, no salvage, and equipment was purchased for $150,000. (d) Bonds payable for $75,000 were retired by payment at their face amount. (e) 2,500 shares of common stock were issued at $30 for cash. Copyright Cengage Learning. Powered by Cognero.

Page 101

Chapter 16 - Statement of Cash Flows (f) Cash dividends declared and paid, $40,000. (g) Investments of $100,000 were sold for $125,000. Prepare a statement of cash flows using the indirect method. ANSWER: Barry Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: Net income

$ 75,800

Adjustments to reconcile net income to net cash flow from operating activities: Depreciation

38,000

Gain on sale of investments

(25,000)

Changes in current operating assets and liabilities: Decrease in accounts receivable

9,200

Increase in accounts payable

12,500

Increase in inventories

(16,000) $94,500

Net cash flow from operating activities Cash flows from investing activities: Cash from sale of investments

$125,000

Cash paid for purchase of equipment

(150,000) (25,000)

Net cash flow used for investing activities Cash flows from financing activities: Cash from sale of common stock

$75,000

Cash paid to retire bonds payable

(75,000)

Cash paid for dividends

(40,000)

Net cash flow used for financing activities

POINTS: DIFFICULTY:

(40,000)

Increase in cash

$29,500

Cash at the beginning of the year

42,500

Cash at the end of the year

$72,000

1 Challenging

Page 102

Chapter 16 - Statement of Cash Flows Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 8:10 PM 173. Dickinson Company reported net income of $155,000 for the current year. Depreciation recorded on buildings and equipment amounted to $65,000 for the year. In addition, a building with an original cost of $250,000 and accumulated depreciation of $190,000 on the date of the sale was sold for $75,000. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $20,000 $15,000 Accounts Receivable 19,000 32,000 Inventories 50,000 65,000 Accounts Payable 12,000 18,000 Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER:

Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense Gain on sale of building Changes in current operating assets and liabilities: Decrease in accounts receivable Decrease in inventories Decrease in accounts payable Net cash from operating activities

$155,000

65,000 (15,000) 13,000 15,000 (6,000) $227,000

POINTS: DIFFICULTY:

Page 103

Chapter 16 - Statement of Cash Flows 174. The net income reported on the income statement for the current year was $58,000. Depreciation recorded on fixed assets for the year was $24,000. In addition, equipment with an original cost of $130,000 and accumulated depreciation of $115,000 on the date of the sale, was sold for $20,000. Balances of the current asset and current liability accounts at the end and beginning of the year are listed below. Prepare the Cash flows from operating activities section of a statement of cash flows using the indirect method.

Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable

ANSWER:

End $65,000 70,000 85,000 4,000 50,000 4,500 6,000

Beginning $ 70,000 63,000 102,000 4,500 58,000 6,500 7,500

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Gain on sale of equipment

$58,000

24,000 (5,000)

Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses

17,000 500

Increase in accounts receivable (net)

(7,000)

Decrease in accounts payable

(8,000)

Decrease in salaries payable

(1,500)

Net cash flow from operating activities

$78,000

POINTS: DIFFICULTY:

Page 104

Chapter 16 - Statement of Cash Flows was sold for $15,000; that the stock was issued for cash; and that the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared of $18,000. Year 2

Year 1

$ 90,000

$ 78,000

Accounts Receivable (net)

78,000

85,000

Inventories

106,500

90,000

Equipment

410,000

370,000

Accumulated Depreciation

(150,000)

(158,000)

$534,500

$465,000

$ 53,500

$ 55,000

Cash Dividends Payable

5,000

4,000

Common Stock, $10 par

200,000

170,000

Paid-In Capital in Excess of Par—Common Stock

62,000

60,000

Retained Earnings

214,000

176,000

$534,500

$465,000

Cash

Accounts Payable (merchandise creditors)

ANSWER: Garrett Co. Statement of Cash Flows For Year Ended December 31, Year 2 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash from sale of equipment Cash paid for purchase of equipment Net cash flow used for investing Copyright Cengage Learning. Powered by Cognero.

$ 56,000

57,000* 5,000

7,000 (16,500) (1,500)

$107,000 $ 15,000 (125,000)

Page 105

Chapter 16 - Statement of Cash Flows activities Cash flows from financing activities: Cash received from issuance of common stock Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year * $150,000 – ($158,000 – $65,000) = $57,000 **$18,000 + $4,000 – $5,000 = $17,000

(110,000)

$ 32,000 (17,000)** 15,000 $ 12,000 78,000 $ 90,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 8:14 PM 176. On the basis of the following data for Branch Co. for the current and preceding years ended December 31, prepare a statement of cash flows using the indirect method. Assume that equipment costing $125,000 was purchased for cash and the land was sold for $15,000. The stock was issued for cash and the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared and paid of $18,000.

Cash Accounts Receivable (net) Inventories Land Equipment Accumulated Depreciation

Accounts Payable (merchandise creditors) Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

Current Year $ 65,000 78,000 106,500 — 495,000 (215,000) $529,500

Prior Year $ 54,000 85,000 90,000 20,000 370,000 (158,000) $461,000

$ 53,500 200,000 62,000 214,000 $529,500

$ 55,000 170,000 60,000 176,000 $461,000

ANSWER: Copyright Cengage Learning. Powered by Cognero.

Page 106

Chapter 16 - Statement of Cash Flows Branch Co. Statement of Cash Flows For Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of land Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from sale of land Cash paid for purchase of equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from sale of common stock Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year

$ 56,000

57,000 5,000

7,000 (16,500) (1,500) $107,000 $ 15,000 (125,000) (110,000) $32,000 (18,000) 14,000 $ 11,000 54,000 $ 65,000

POINTS: DIFFICULTY:

Page 107

Chapter 16 - Statement of Cash Flows a statement of cash flows using the indirect method. Assume that equipment costing $25,000 was purchased for cash and no long-term assets were sold during the period. Stock was issued for cash—3,200 shares at par. Net income for the current year was $76,000. Cash dividends declared and paid were $13,000.

Cash Accounts Receivable (net) Inventories Equipment Accumulated Depreciation

Accounts Payable (merchandise creditors) Taxes Payable Common Stock, $10 par Retained Earnings

Current Year $170,000 78,000 106,500 395,000 (195,000) $554,500

Prior Year $ 74,000 85,000 90,000 370,000 (158,000) $461,000

$ 51,000 2,500 262,000 239,000 $554,500

$ 50,000 5,000 230,000 176,000 $461,000

ANSWER: Breach Co. Statement of Cash Flows For Year Ended December 31 Cash flows from operating activities: Net income

$ 76,000

Adjustments to reconcile net income to net cash flow from operating activities: Depreciation

37,000

Changes in current operating assets and liabilities: Decrease in accounts receivable

7,000

Increase in accounts payable

1,000

Increase in inventories

(16,500)

Decrease in taxes payable

(2,500) $102,000

Net cash flow from operating activities Cash flows from investing activities: Cash paid for purchase of equipment Net cash flow used for investing activities

$ (25,000) (25,000)

Cash flows from financing activities: Copyright Cengage Learning. Powered by Cognero.

Page 108

Chapter 16 - Statement of Cash Flows Cash received from sale of common stock

$ 32,000

Cash paid for dividends

(13,000)

Net cash flow from financing activities

19,000 $ 96,000

Increase in cash

74,000

Cash at the beginning of the year

$170,000

Cash at the end of the year POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 8:48 AM 178. Complete each of the columns in the table below, indicating in which section each item would be reported on the statement of cash flows (operating, investing, or financing), the amount that would be reported, and whether the item would create an increase or decrease in cash. For items that affect more than one section of the statement, indicate all affected. Assume the indirect method of reporting cash flows from operating activities. The first item has been completed as an example. Statement Item Section Depreciation of $15,000 for the Operating period Issuance of common stock for $35,000 Increase in accounts payable of $7,000 Retirement of $100,000 bonds payable at 97 Purchase of long-term investments for $94,500 Dividends declared and paid of $8,300 Increase in prepaid rent of $4,500 Decrease in inventory of $5,300 Purchase of equipment for $17,600 cash

Amount to Report

+/– Effect on Cash

$15,000

Increase

Page 109

Chapter 16 - Statement of Cash Flows Sale of land originally costing $134,000 for $130,000 Decrease in taxes payable of $2,100 ANSWER: Item

Amount +/– Statement to Effect Section Report on Cash

Depreciation of $15,000 for the period

Operating$15,000 Increase

Issuance of common stock for $35,000

Financing

35,000 Increase

Increase in accounts payable of $7,000

Operating

7,000 Increase

Retirement of $100,000 bonds payable at 97

Operating 3,000 Increase Financing 97,000 Decrease

Purchase of long-term investments for $94,500

Investing

94,500Decrease

Dividends declared and paid of $8,300

Financing

8,300Decrease

Increase in prepaid rent of $4,500

Operating

4,500Decrease

Decrease in inventory of $5,300

Operating

5,300 Increase

Purchase of equipment for $17,600 cash

Investing

17,600Decrease

Sale of land originally costing $134,000 for $130,000

Operating 4,000 Increase Investing 130,000 Increase

Decrease in taxes payable of $2,100

Operating

2,100Decrease

POINTS: DIFFICULTY:

Page 110

Chapter 16 - Statement of Cash Flows 179. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows:

Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation

End $ 62,000 75,000 54,000

Beginning $73,000 60,000 47,000

43,000 2,800 210,000 70,000 67,000

37,000 3,800

Use the direct method to prepare the Cash flows from operating activities section of a statement of cash flows. ANSWER:

Cash flows from operating activities: Cash received from customers

$195,000

Cash payments for merchandise

(71,000)

Cash payments for operating expenses

(68,000)

Net cash flow from operating activities

$ 56,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 8:17 PM 180. The comparative balance sheets of ConnieJo Company, for Years 1 and 2 ended December 31, appear below in condensed form.

Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment Copyright Cengage Learning. Powered by Cognero.

Year 2

Year 1

$ 45,000 51,300 147,200 0 493,000 (113,700) $622,800

$ 53,500 58,000 135,000 60,000 375,000 (128,000) $553,500 Page 111

Chapter 16 - Statement of Cash Flows

Accounts Payable Bonds Payable, Due Year 4 Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

$61,500 0 250,000 75,000 236,300 $622,800

$42,600 100,000 200,000 50,000 160,900 $553,500

$623,000 348,500 $274,500 $24,700 75,300

$ 5,000 (12,000)

100,000 $174,500

(7,000) $167,500 64,100 $103,400

Additional data for the current year are as follows: (a) Fully depreciated equipment costing $39,000 was scrapped, no salvage, and equipment was purchased for $157,000. (b) Bonds payable for $100,000 were retired by payment at their face amount. (c) 5,000 shares of common stock were issued at $15 for cash. (d) Cash dividends declared were paid, $28,000. (e) All sales are on account. Prepare a statement of cash flows using the direct method of reporting cash flows from operating activities. ANSWER: ConnieJo Company Statement of Cash Flows For the Year Ended December 31, Year 2

Cash flows from operating activities: Cash received from customers

$629,700

Cash payments for merchandise

(341,800)

Cash payments for operating expenses

(75,300)

Cash payments for interest

(12,000)

Cash payments for income taxes

(64,100)

Page 112

Chapter 16 - Statement of Cash Flows $136,500

Net cash flow from operating activities Cash flows from investing activities: Cash received from sale of investments

$ 65,000

Cash paid for purchase of equipment

(157,000)

Net cash flow used for investing activities

(92,000)

Cash flows from financing activities: Cash received from sale of common stock

$ 75,000

Cash paid for dividends

(28,000)

Cash paid to retire bonds payable

(100,000)

Net cash flow used for financing activities

(53,000)

Decrease in cash

$ (8,500)

Cash at the beginning of the year

53,500

Cash at the end of the year

$ 45,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 3/3/2017 8:18 PM

Page 113

Chapter 16 - Statement of Cash Flows 181. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: (a) (b)

If sales for the current year were $375,000 and accounts receivable increased by $29,000 during the year, what was the amount of cash received from customers? If income tax for the current year was $39,000 and income tax payable decreased by $21,000 during the year, what was the amount of cash payments for income tax?

ANSWER:

(a) Sales Less increase in accounts receivable Cash received from customers

(b) Income tax Add decrease in income taxes payable Cash payments for income tax POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/27/2017 3:35 PM

$375,000 29,000 $346,000

$39,000 21,000 $60,000

Page 114

Chapter 16 - Statement of Cash Flows 182. Selected data for the current year ended December 31 are as follows:

Accrued Expenses (operating expenses) Accounts Payable (merchandise creditors) Inventories Prepaid Expenses

Balance December 31 $29,500 90,000 42,500 23,000

Balance January 1 $ 22,000 135,000 68,000 20,000

During the current year, the cost of merchandise sold was $620,000 and the operating expenses other than depreciation were $142,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Determine the amount reported on the statement of cash flows for (a) cash payments for merchandise and (b) cash payments for operating expenses. ANSWER:

(a) Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash payments for merchandise (b) Operating expenses other than depreciation Increase in accrued expenses Increase in prepaid expenses Cash payments for operating expenses

$620,000 45,000 $665,000 (25,500) $639,500 $142,000 (7,500) $134,500 3,000 $137,500

POINTS: DIFFICULTY:

Page 115

Chapter 16 - Statement of Cash Flows 183. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows:

Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation

End $ 67,000 73,000 54,000

Beginning $73,000 60,000 47,000

43,000 2,800 210,000 70,000

37,000 3,800

67,000

Use the direct method to prepare the Cash flows from operating activities section of a statement of cash flows. ANSWER:

Cash flows from operating activities: Cash received from customers

$197,000

Cash payments for merchandise

(71,000)

Cash payments for operating expenses

(68,000)

Net cash flow from operating activities

$ 58,000

POINTS: DIFFICULTY:

Page 116

Chapter 16 - Statement of Cash Flows 184. Cost of merchandise sold reported on the income statement was $155,000. The accounts payable balance increased $8,000, and the inventory balance increased by $21,000 over the year. Determine the amount of cash paid for merchandise. ANSWER:

Cost of merchandise sold Increase in inventories Increase in accounts payable Cash payments for merchandise

$155,000 21,000 (8,000) $168,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 9:09 AM 185. Sales reported on the income statement were $690,000. The accounts receivable balance declined $39,000 over the year. Determine the amount of cash received from customers. ANSWER:

Sales Decrease in accounts receivable Cash received from customers

$690,000 39,000 $729,000

POINTS: DIFFICULTY:

Page 117

Chapter 16 - Statement of Cash Flows 186. Selected data taken from the accounting records of Laser Inc. for the current year ended December 31 are as follows: Balance, Balance, December 31 January 1 Accrued expenses payable $ 5,590 $ 6,110 Accounts payable (merchandise creditors) 41,730 46,020 Inventories 77,350 84,110 Prepaid expenses 3,250 3,900 During the current year, the cost of merchandise sold was $448,500, and the operating expenses other than depreciation were $78,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Required Determine the amount reported on the statement of cash flows for: (a) Cash payments for merchandise (b) Cash payments for operating expenses ANSWER:

(a) Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash payments for merchandise (b) Operating expenses other than depreciation Decrease in accrued expenses payable Decrease in prepaid expenses Cash payments for operating expenses

$448,500 4,290 $452,790 (6,760) $446,030 $78,000 520 $78,520 (650) $77,870

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 187. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: (a) If sales for the current year were $695,000 and accounts receivable decreased by $43,500 during the year, what was the amount of cash received from customers? (b) If income tax expense for the current year was $56,000 and income tax payable decreased by $5,200 during the year, what was the amount of cash payments for income tax?

ANSWER:

(a) Sales Decrease in accounts receivable Cash received from customers

$695,000 43,500 $738,500

(b) Income tax expense Decrease in income tax payable Cash payments for income tax

$ 56,000 5,200 $ 61,200

POINTS: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 188. Based on the following, what is free cash flow? Net cash flow from operating activities Net cash flow used for investing activities Net cash flow used for financing activities

$318,000 (30,000) 30,000

Cash flows from operations include $2,000 for depreciation. Cash flows from investing include the purchase of a replacement asset for $100,000 and the sale of the one used in production, which is now obsolete, for $70,000. Cash flows from financing include $70,000 of borrowing. ANSWER: POINTS: DIFFICULTY:

$318,000 – $100,000 = $218,000 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 9:15 AM

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Chapter 16 - Statement of Cash Flows 189. Connor Designs Company has cash flows for operating activities of $425,000. Cash flows used for investments in property, plant, and equipment totaled $65,000, of which 70% was used to replace machinery to maintain existing capacity. What is the free cash flow for Connor Designs? ANSWER:

Cash flows from operating activities

$425,000

Cash paid to maintain current production levels of property, plant, and equipment

(45,500)*

Free cash flow

$379,500

*Property, plant, and equipment to maintain productive capacity: $65,000 × 70% = $45,500 POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:14 PM DATE MODIFIED: 2/28/2017 9:17 AM

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Chapter 17 - Financial Statement Analysis True / False 1. Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:09 PM 2. When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 17 - Financial Statement Analysis 3. Comparative financial statements are designed to compare the financial statements of two or more corporations. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 4. In horizontal analysis, the current year is the base year. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 5. On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 6. The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:10 PM

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Chapter 17 - Financial Statement Analysis 7. A 15% change in sales will result in a 15% change in net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 8. A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 17 - Financial Statement Analysis 9. The relationship of each asset item as a percent of total assets is an example of vertical analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 10. Vertical analysis refers to comparing the financial statements of a single company over several years. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 17 - Financial Statement Analysis 11. In a common-sized income statement, each item is expressed as a percentage of net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 12. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 17 - Financial Statement Analysis 13. Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 14. In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 17 - Financial Statement Analysis 15. The excess of current assets over current liabilities is referred to as working capital. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 16. Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

Page 8

Chapter 17 - Financial Statement Analysis 17. Using measures to assess a business's ability to pay its current liabilities is called current position analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 18. Current position analysis is used by short-term creditors to assess how quickly they will be repaid. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 17 - Financial Statement Analysis 19. An advantage of the current ratio is that it considers the makeup of the current assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 20. If two companies have the same current ratio, their ability to pay short-term debt is the same. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 17 - Financial Statement Analysis 21. The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the current ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 22. A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000. The current ratio is 2.5. a. True b. False ANSWER:

True

RATIONALE:

Current Ratio = Current Assets/Current Liabilities = (Cash + Marketable Securities + Receivables + Inventories)/Current Liabilities = ($75,000 + $115,000 + $150,000 + $222,500)/$225,000 = $562,500/$225,000 = 2.5 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:13 PM

Page 11

Chapter 17 - Financial Statement Analysis 23. If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio to decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:14 PM 24. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 25. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 26. An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection practices. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 17 - Financial Statement Analysis 27. The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 28. A firm selling food should have a higher inventory turnover rate than a firm selling office furniture. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

Page 14

Chapter 17 - Financial Statement Analysis 29. The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 30. Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:07 PM

Page 15

Chapter 17 - Financial Statement Analysis 31. Solvency analysis focuses on the ability of a business to pay its long-term liabilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 32. The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

Page 16

Chapter 17 - Financial Statement Analysis 33. A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:16 PM 34. In computing the asset turnover ratio, long-term investments are excluded from average total assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 17 - Financial Statement Analysis 35. The return on total assets measures the profitability of total assets, without considering how the assets are financed. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:18 PM 36. In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:19 PM

Page 18

Chapter 17 - Financial Statement Analysis 37. The denominator of the return on total assets ratio is the average total assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:19 PM 38. When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:20 PM

Page 19

Chapter 17 - Financial Statement Analysis 39. When computing the return on common stockholders' equity, preferred stock dividends are subtracted from net income. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:21 PM 40. If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 20

Chapter 17 - Financial Statement Analysis 41. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 42. The dividend yield is equal to the dividends per share divided by the par value per share of common stock. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 17 - Financial Statement Analysis 43. Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 44. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 22

Chapter 17 - Financial Statement Analysis 45. Analyzing a company's performance should take into account conditions peculiar to the industry and the general economic conditions. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:23 PM 46. A company can compare its financial data to the data of other companies and industry averages to evaluate its position. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 23

Chapter 17 - Financial Statement Analysis 47. If Epsilon Company's price-earnings ratio on common stock is greater than Iota Company's, then Iota Company would be expected to have the best potential for future common stock price appreciation. a. True b. False ANSWER:

False

RATIONALE:

The price-earnings (P/E) ratio on common stock measures a company’s future earnings prospects. Therefore, a smaller P/E ratio means Iota Company would be expected to have a less potential for future common stock price appreciation. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:24 PM 48. The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

Page 24

Chapter 17 - Financial Statement Analysis 49. The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company’s auditors. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 50. The auditor's report is where the auditor certifies that the financial statements are correct and accurate. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

Page 25

Chapter 17 - Financial Statement Analysis 51. In a company's annual report, the section called Management Discussion and Analysis provides critical information for interpreting the financial statements and assessing the future of the company. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:25 PM 52. A clean audit opinion is not the same as an unmodified opinion. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 26

Chapter 17 - Financial Statement Analysis 53. Unusual items affecting the current period’s income statement consist of changes in accounting principles and discontinued operations. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:27 PM 54. When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 55. An unusual item is often related to current operations and occurs infrequently. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:27 PM 56. Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on income and cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 57. Unusual items affecting the prior period’s income statement consist of changes in or errors in applying accounting principles. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:28 PM 58. Earnings per share amounts are only required to be presented for income from continuing operations and net income on the face of the statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:06 PM

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Chapter 17 - Financial Statement Analysis Multiple Choice 59. Which of the following is not a characteristic evaluated in ratio analysis? a. liquidity b. profitability c. solvency d. marketability ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:12 PM 60. Short-term creditors are typically most interested in analyzing a company's a. marketability b. profitability c. operating results d. liquidity ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 61. The percentage analysis of increases and decreases in individual items in comparative financial statements is called a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 62. Which of the following is the most useful in analyzing companies of different sizes? a. comparative statements b. common-sized financial statements c. price-level accounting d. audit report ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 63. The percent of fixed assets to total assets is an example of a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 64. What type of analysis is indicated by the following?

Current assets Fixed assets a. vertical analysis b. horizontal analysis c. liquidity analysis d. common-size analysis

Current Year Preceding Year $ 430,000 $ 500,000 1,740,000 1,500,000

Increase (Decrease) Amount Percent $(70,000) (14)% 240,000 16

ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:14 PM

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Chapter 17 - Financial Statement Analysis 65. An analysis in which all the components of an income statement are expressed as a percentage of sales is a a. vertical analysis b. horizontal analysis c. liquidity analysis d. solvency analysis ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:15 PM 66. A balance sheet that displays only component percentages is a a. trend balance sheet b. comparative balance sheet c. condensed balance sheet d. common-sized balance sheet ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 67. One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to a. judge the relative potential of two companies of similar size in different industries b. determine which companies in a single industry are of the same value c. determine which companies in a single industry are of the same size d. make a better comparison of two companies of different sizes in the same industry ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 68. Assume the following sales data for a company: Current year Preceding year

$325,000 250,000

What is the percentage increase in sales from the preceding year to the current year? a. 70% b. 76.9% c. 30% d. 50% ANSWER:

RATIONALE:

Percentage Increase in Sales in Current Year = [(Current Year Sales – Preceding Year Sales)/Preceding Year Sales] × 100 = [($325,000 – $250,000)/$250,000] × 100 = ($75,000/$250,000) × 100 = 30% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:17 PM

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Chapter 17 - Financial Statement Analysis 69. On a common-sized balance sheet, 100% is a. total property, plant, and equipment b. total current assets c. total liabilities d. total assets ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:17 PM 70. On a common-sized income statement, 100% is the a. net cost of goods sold b. net income c. gross profit d. sales ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 71. Horizontal analysis is a technique for evaluating financial statement data a. for one period of time b. over a period of time c. on a certain date d. as it may appear in the future ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 72. Horizontal analysis of comparative financial statements includes a. development of common-sized statements b. calculation of liquidity ratios c. calculation of dollar amount changes and percentage changes from the previous to the current year d. evaluation of each component in a financial statement to a total within the statement ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:19 PM

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Chapter 17 - Financial Statement Analysis 73. In horizontal analysis, each item is expressed as a percentage of the a. base year figure b. retained earnings figure c. total assets figure d. net income figure ANSWER: POINTS: DIFFICULTY:

Page 38

Chapter 17 - Financial Statement Analysis 74. Assume the following sales data for a company: Current year Preceding year

$1,025,000 820,000

What is the percentage increase in sales from the preceding year to the current year? a. 100% b. 25% c. 125% d. 75% ANSWER:

RATIONALE:

Percentage Increase in Sales in Current Year = [(Current Year Sales – Preceding Year Sales)/Preceding Year Sales] × 100 = [($1,025,000 – $820,000)/$820,000] × 100 = ($205,000/$820,000) × 100 = 25% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:20 PM

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Chapter 17 - Financial Statement Analysis 75. The following income statement information is for Sadie Company: Sales Cost of goods sold Gross profit

$175,000 115,000 $ 60,000

Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin. a. 100% b. 66.5% c. 34.3% d. 29.4% ANSWER:

RATIONALE:

Cost of Goods Sold as a Percent of Sales = (Cost of Goods Sold/Sales) × 100 = ($115,000/$175,000) × 100 = 65.7% Gross Profit Margin = 100% – Cost of Goods Sold as a Percent of Sales = 100% – 65.7% = 34.3% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:21 PM

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Chapter 17 - Financial Statement Analysis 76. In a vertical analysis, the base for cost of goods sold is a. total selling expenses b. sales c. total expenses d. gross profit ANSWER: POINTS: DIFFICULTY:

RATIONALE: POINTS: DIFFICULTY:

Ratio = $325,000/$125,000 = 2.6 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 8:49 PM

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Chapter 17 - Financial Statement Analysis Use the information below for Harding Company to answer the questions that follow. Harding Company Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Notes payable (short-term) Property, plant, and equipment Prepaid expenses

$ 40,000 65,000 7,000 30,000 40,000 72,000 110,000 75,000 36,000 30,000 625,000 2,000

78. Based on the data for Harding Company, what is the amount of quick assets? a. $205,000 b. $203,000 c. $131,000 d. $66,000 ANSWER:

RATIONALE:

Quick Assets = Accounts Receivable + Cash + Marketable Securities = $65,000 + $30,000 + $36,000 = $131,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:23 PM

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Chapter 17 - Financial Statement Analysis 79. Based on the data for Harding Company, what is the amount of working capital? a. $238,000 b. $128,000 c. $168,000 d. $203,000 ANSWER:

RATIONALE:

Working Capital = (Accounts Receivable + Cash + Inventory + Marketable Securities + Prepaid Expenses) – (Accounts Payable + Accrued Liabilities + Notes Payable) = ($65,000 + $30,000 + $72,000 + $36,000 + $2,000) – ($40,000 + $7,000 + $30,000) = $128,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:24 PM

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Chapter 17 - Financial Statement Analysis 80. Based on the data for Harding Company, what is the quick ratio, rounded to one decimal point? a. 2.7 b. 2.6 c. 1.7 d. 0.9 ANSWER:

RATIONALE:

Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities + Notes Payable) = ($65,000 + $30,000 + $36,000)/($40,000 + $7,000 + $30,000) = $131,000/$77,000 = 1.7 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:25 PM

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Chapter 17 - Financial Statement Analysis 81. A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is a. $845,000 b. $595,000 c. $720,000 d. $125,000 ANSWER:

RATIONALE:

Current Ratio = Current Assets/Current Liabilities = 2.2 Current Assets = 2.2 × Current Liabilities Working Capital = Current Assets – Current Liabilities = $720,000 Working Capital = (2.2 × Current Liabilities) – Current Liabilities Working Capital = 1.2 × Current Liabilities = $720,000 Current Liabilities = $720,000/1.2 = $600,000 Therefore, Working Capital = Current Assets – $600,000 = $720,000 Current Assets = $720,000 + $600,000 = $1,320,000 Current Assets (after payment of short-term liability) = $1,320,000 – $125,000 = $1,195,000 Current Liabilities (after payment of short-term liabilities) = $600,000 – $125,000 = $475,000 Working Capital = $1,195,000 – $475,000 = $720,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 10:57 PM

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Chapter 17 - Financial Statement Analysis 82. Which of the following measures a company’s ability to pay its current liabilities? a. earnings per share b. inventory turnover c. current ratio d. times interest earned ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 9:10 PM 83. Which of the following is not included in the computation of the quick ratio? a. inventory b. marketable securities c. accounts receivable d. cash ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

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Chapter 17 - Financial Statement Analysis 84. The numerator in calculating the accounts receivable turnover is a. total assets b. sales c. accounts receivable at year-end d. average accounts receivable ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:26 PM

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Chapter 17 - Financial Statement Analysis 85. Based on the following data, what is the accounts receivable turnover? Sales on account during year Cost of goods sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year a. 17.5 b. 2.6 c. 20.0 d. 15.5 ANSWER:

$700,000 270,000 45,000 35,000 90,000 110,000

RATIONALE:

Accounts Receivable Turnover = Sales/Average Accounts Receivable = $700,000/[($45,000 + $35,000)/2] = 17.5 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:27 PM

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Chapter 17 - Financial Statement Analysis 86. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to a. decrease b. remain the same c. either increase or decrease d. increase ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 9:12 PM

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Chapter 17 - Financial Statement Analysis 87. Based on the following data for the current year, what is the number of days' sales in receivables? Sales on account during year Cost of goods sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year a. 7.3 b. 2.5 c. 14.6 d. 25 ANSWER:

$584,000 300,000 45,000 35,000 90,000 110,000

RATIONALE:

Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Daily Sales = [($45,000 + $35,000)/2]/($584,000/365 days) = 25 days POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:28 PM

Page 50

Chapter 17 - Financial Statement Analysis 88. Based on the following data for the current year, what is the inventory turnover? Sales on account during year Cost of goods sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year a. 2.7 b. 9.7 c. 2.5 d. 3.0 ANSWER:

$700,000 270,000 45,000 35,000 90,000 110,000

RATIONALE:

Inventory Turnover = Cost of Goods Sold/Average Inventory = $270,000/[($90,000 + $110,000)/2] = $270,000/$100,000 = 2.7 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:28 PM

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Chapter 17 - Financial Statement Analysis 89. Based on the following data for the current year, what is the number of days' sales in inventory? Sales on account during year Cost of goods sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year a. 51.2 b. 44.4 c. 6.5 d. 7.5 ANSWER:

$1,204,500 657,000 75,000 85,000 85,600 98,600

RATIONALE:

Number of Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Goods Sold = Average Inventory/(Cost of Goods Sold/365 days) = [($85,600 + $98,600)/2]/($657,000/365 days) = 51.2 days POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 9:28 PM

Page 52

Chapter 17 - Financial Statement Analysis 90. The current ratio is a. used to evaluate a company's liquidity and short-term debt-paying ability b. a solvency measure that indicates the margin of safety for bondholders c. calculated by dividing current liabilities by current assets d. calculated by subtracting current liabilities from current assets ANSWER: POINTS: DIFFICULTY:

Page 53

Chapter 17 - Financial Statement Analysis 91. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease b. both increase c. increase and remain the same, respectively d. remain the same and decrease, respectively ANSWER:

RATIONALE:

Before payment of current liability, Current Assets = $70,000 Current Liabilities = $50,000 Current Ratio = Current Assets/Current Liabilities = $70,000/$50,000 = 1.40 Working Capital = Current Assets – Current Liabilities = $70,000 – $50,000 = $20,000 After payment of current liability, Current Assets (after payment of current liability) = $70,000 – $1,000 = $69,000 Current Liabilities (after payment of current liability) = $50,000 – $1,000 = $49,000 Current Ratio (after payment of current liability) = $69,000/$49,000 = 1.41 Working Capital (after payment of current liability) = $69,000 – $49,000 = $20,000 Therefore, the current ratio will increase from 1.40 to 1.41 and working capital will remain $20,000 after the payment of the current liability of $1,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 10:28 PM 92. Brock Company's financial information is listed below. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 215,000 $310,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common

$ 60,000 95,000 155,000

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Chapter 17 - Financial Statement Analysis Total liabilities and stockholders’ equity

$310,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Net income

$90,000 45,000 $45,000 20,000 $25,000

Number of shares of common stock Market price of common stock

6,000 $20

What is the current ratio? a. 1.42 b. 1.17 c. 1.58 d. 0.67 ANSWER:

RATIONALE:

Current Ratio = Current Assets/Current Liabilities = [Cash and Short-Term Investments + Accounts Receivable (net) + Inventory]/Current Liabilities = ($40,000 + $30,000 + $25,000)/$60,000 = $95,000/$60,000 = 1.58 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:29 PM

Page 55

Chapter 17 - Financial Statement Analysis Use the information below for Privett Company to answer the questions that follow. Privett Company Accounts payable $ 30,000 Accounts receivable 35,000 Accrued liabilities 7,000 Cash 25,000 Intangible assets 40,000 Inventory 72,000 Long-term investments 100,000 Long-term liabilities 75,000 Marketable securities 36,000 Notes payable (short-term) 20,000 Property, plant, and equipment 400,000 Prepaid expenses 2,000 93. Based on the data for Privett Company, what is the amount of quick assets? a. $168,000 b. $96,000 c. $60,000 d. $61,000 ANSWER:

RATIONALE:

Quick Assets = Accounts Receivable + Cash + Marketable Securities = $35,000 + $25,000 + $36,000 = $96,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data 2 LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:30 PM

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Chapter 17 - Financial Statement Analysis 94. Based on the data for Privett Company, what is the amount of working capital? a. $213,000 b. $113,000 c. $153,000 d. $39,000 ANSWER:

RATIONALE:

Working Capital = Current Assets – Current Liabilities = (Accounts Receivable + Cash + Inventory + Marketable Securities + Prepaid Expenses) – (Accounts Payable + Accrued Liabilities + Notes Payable) = ($35,000 + $25,000 + $72,000 + $36,000 + $2,000) – ($30,000 + $7,000 + $20,000) = $170,000 – $57,000 = $113,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data 2 LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:31 PM

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Chapter 17 - Financial Statement Analysis 95. Based on the data for Privett Company, what is the quick ratio, rounded to one decimal point? a. 1.7 b. 2.9 c. 1.1 d. 1.0 ANSWER:

RATIONALE:

Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities + Notes Payable) = ($35,000 + $25,000 + $36,000)/($30,000 + $7,000 + $20,000) = $90,000/$57,000 = 1.7 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: data 2 LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:31 PM 96. The ability of a business to pay its debts as they come due and to earn a reasonable net income includes a. solvency and leverage b. solvency and profitability c. solvency and liquidity d. solvency and equity ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:32 PM

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Chapter 17 - Financial Statement Analysis 97. Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis? a. ratio of fixed assets to long-term liabilities b. asset turnover ratio c. number of days' sales in receivables d. return on stockholders' equity ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 11:55 PM 98. Times interest earned is computed as a. net income plus interest expense, divided by interest expense b. income before income tax plus interest expense, divided by interest expense c. net income divided by interest expense d. income before income tax divided by interest expense ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:33 PM

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Chapter 17 - Financial Statement Analysis 99. Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,000,000 300,000 2,000,000 550,000 80,000 50,000 15,000

Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.) a. 1.5 b. 6.4 c. 6.5 d. 5.5 ANSWER:

RATIONALE:

Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$550,000 + ($1,000,000 × $10%)]/($1,000,000 × 10%) = $650,000/$100,000 = 6.5 times POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:34 PM

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Chapter 17 - Financial Statement Analysis 100. Hsu Company reported the following on its income statement: $420,000 120,000 $300,000

Income before income taxes Income tax expense Net income

Interest expense was $80,000. Hsu Company's times interest earned ratio is a. 8 times b. 6.25 times c. 5.25 times d. 5 times ANSWER:

RATIONALE:

Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = ($420,000 + $80,000)/$80,000 = 6.25 times POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 1:35 PM

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Chapter 17 - Financial Statement Analysis 101. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are a. a substitute for sound judgment b. useful analytical measures c. enough information for analysis; industry information is not needed d. unnecessary for analysis if industry information is available ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 6:02 AM 102. The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of a. leverage b. solvency c. yield d. quick assets ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:01 PM

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Chapter 17 - Financial Statement Analysis Use this information for Kellman Company to answer the questions that follow. The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2 Year 1 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 65,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, $100 par 100,000 100,000 Common stock, $10 par 600,000 600,000 Paid-in capital in excess of par—Common stock 75,000 75,000 Retained earnings 310,000 210,000 103. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year? a. 10.4% b. 11.9% c. 10.5% d. 8.4% ANSWER:

RATIONALE:

Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Average Total Assets = (Total Assets of Year 2 + Total Assets of Year 1)/2 Average Total Assets = [($600,000 + $60,000 + $900,000) + ($560,000 + $40,000 + $700,000)]/2 = ($1,560,000 + $1,300,000)/2 = $1,430,000 Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Return on Total Assets = ($150,000 + $20,000)/$1,430,000 = 11.9% POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: balance sheets LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:02 PM

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Chapter 17 - Financial Statement Analysis 104. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2? a. 6.9% b. 14.5% c. 16.04% d. 13.8% ANSWER:

RATIONALE:

Return on Stockholders’ Equity = Net Income/Average Total Stockholders’ Equity Average Total Stockholders’ Equity = (Total Stockholders' Equity of Year 2 + Total Stockholders' Equity of Year 1)/2 Average Total Stockholders’ Equity = [($600,000 + $75,000 + $310,000) + ($600,000 + $75,000 + $210,000)]/2 Average Total Stockholders’ Equity = ($985,000 + $885,000)/2 = $1,870,000/2 = $935,000 Return on Stockholders’ Equity = $150,000/$935,000 = 16.04% POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: balance sheets LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:02 PM

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Chapter 17 - Financial Statement Analysis 105. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2? a. $4.16 b. $4.32 c. $4.02 d. $2.49 ANSWER:

RATIONALE:

Earnings per Share (EPS) on Common Stock for Year 2 = (Net Income − Preferred Dividends)/Shares of Common Stock Outstanding Preferred Dividends = $100,000 × 9% = $9,000 Earnings per Share (EPS) on Common Stock for Year 2 = ($250,000 – $9,000)/($600,000/$10) Earnings per Share (EPS) on Common Stock for Year 2 = $241,000/60,000 = $4.02 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: balance sheets LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:03 PM

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Chapter 17 - Financial Statement Analysis 106. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation to two decimal places and final answers to one decimal place.) a. 7.5 b. 13.4 c. 12.1 d. 8.5 ANSWER:

RATIONALE:

Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share (EPS) on Common Stock for Year 2 = (Net Income − Preferred Dividends)/Shares of Common Stock Outstanding Preferred Dividends = $100,000 × 9% = $9,000 Earnings per Share (EPS) on Common Stock for Year 2 = ($250,000 – $9,000)/($600,000/$10) Earnings per Share (EPS) on Common Stock for Year 2 = $241,000/60,000 = $4.02 Price-Earnings (P/E) Ratio = $30/$4.02 = 7.5 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: balance sheets LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:06 PM

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Chapter 17 - Financial Statement Analysis 107. The numerator of the return on common stockholders' equity is a. net income b. net income minus preferred dividends c. income before income tax d. operating income minus interest expense ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:05 PM 108. The numerator of the return on total assets is a. net income b. net income plus tax expense c. net income plus interest expense d. net income minus preferred dividends ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:05 PM

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Chapter 17 - Financial Statement Analysis 109. The following information is available for Jase Company: Market price per share of common stock Earnings per share on common stock

$25.00 $1.25

Which of the following statements is correct? a. The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of the year. b. The price-earnings ratio is 5% and a share of common stock was selling for 5% more than the amount of earnings per share at the end of the year. c. The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of the year. d. The market price per share and the earnings per share are not statistically related to each other. ANSWER:

RATIONALE:

Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock = $25.00/$1.25 = 20 In other words, a share of common stock of Jase Company was selling for 20 times earnings per share. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:06 PM

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Chapter 17 - Financial Statement Analysis 110. The following information is available for Meyer Company: Dividends per share of common stock Market price per share of common stock

$1.80 $30.00

Which of the following statements is correct? a. The dividend yield is 6.0%, which is of interest to investors seeking an increase in market price of their stocks. b. The dividend yield is 6.0%, which is of special interest to investors seeking to earn revenue on their investments. c. The dividend yield is 16.7%, which is of interest to bondholders. d. The dividend yield is 16.7%, which is an important measure of solvency. ANSWER:

RATIONALE:

Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $1.80/$30.00 = 6.0% Dividend yield is of special interest to investors whose objective is to earn revenue (dividends) from their investment. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:07 PM

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Chapter 17 - Financial Statement Analysis 111. The particular analytical measures chosen to analyze a company may be influenced by all of the following except a. industry type b. general economic environment c. diversity of business operations d. product quality or service effectiveness ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 6:32 AM 112. A common measure of liquidity is a. the asset turnover ratio b. dividends per share of common stock c. the accounts receivable turnover d. the profit margin ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM

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Chapter 17 - Financial Statement Analysis 113. Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had 50,000 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $35 per share. The price-earnings ratio is a. 7 times b. 14 times c. 2 times d. 5 times ANSWER:

RATIONALE:

Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock = $35/($250,000/50,000 shares) = 7 times POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:06 PM 114. Leverage implies that a company a. contains debt financing b. contains equity financing c. has a high current ratio d. has a high earnings per share ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:08 PM The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the questions that follow. Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis

Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 30,000 20,000 15,000 185,000 $250,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 45,000 70,000 135,000 $250,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Interest expense Net income

$ 85,000 45,000 $ 40,000 (15,000) (5,000) $ 20,000

Number of shares of common stock outstanding 6,000 Market price of common stock $20 Total dividends paid $9,000 Cash provided by operations $30,000 115. Using the data provided for Diane Company, what is the asset turnover? a. 1.00 b. 2.94 c. 0.18 d. 0.34 ANSWER:

RATIONALE: POINTS: DIFFICULTY:

Asset Turnover = Sales/Average Total Assets = $85,000/$250,000 = 0.34 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:09 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis 116. Using the data provided for Diane Company, what is the return on total assets? a. 10% b. 8% c. 0.1% d. 1% ANSWER:

RATIONALE:

Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets = ($20,000 + $5,000)/$250,000 = 10% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:09 PM 117. Using the data provided for Diane Company, what are the dividends per common share? a. $20.00 b. $3.00 c. $0.67 d. $1.50 ANSWER:

RATIONALE:

Dividends per Common Share = Dividends on Common Stock/Shares of Common Stock Outstanding = $9,000/6,000 shares = $1.50 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:10 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis 118. Using the data provided for Diane Company, what is the dividend yield? a. 7.5% b. 0.75% c. 13.3% d. 1.3% ANSWER:

RATIONALE:

Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = ($9,000/6,000)/$20 = $1.50/$20 = 7.5% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:11 PM

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Chapter 17 - Financial Statement Analysis 119. Using the data provided for Diane Company, what is the return on common stockholders’ equity? a. 6.75% b. 14.8% c. 7.4% d. 13.5% ANSWER:

RATIONALE:

Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders’ Equity = ($20,000 – $0)/$135,000 = 14.8% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:11 PM

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Chapter 17 - Financial Statement Analysis 120. Using the data provided for Diane Company, what is the price-earnings ratio? a. 8.0 times b. 2.5 times c. 4.0 times d. 6.0 times ANSWER:

RATIONALE:

Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share on Common Stock = Net Income/Shares of Common Stock Outstanding = $20,000/6,000 = $3.33 Price-Earnings (P/E) Ratio = $20/$3.33 = 6.0 times POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Diane Company LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:12 PM 121. The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 215,000 $310,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 60,000 95,000 155,000 $310,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Net income Copyright Cengage Learning. Powered by Cognero.

$90,000 45,000 $45,000 20,000 $25,000 Page 76

Chapter 17 - Financial Statement Analysis

Number of shares of common stock Market price of common stock Dividends per share Cash provided by operations

6,000 $40 $1.00 $40,000

What is the return on total assets for this company? a. 8.1% b. 6.8% c. 10.5% d. 16.1% ANSWER:

RATIONALE:

Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets = ($25,000 + $0)/$310,000 = 8.1% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 7:05 AM 122. The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 280,000 $375,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 60,000 95,000 220,000 $375,000

Income Statement Sales Cost of goods sold Gross margin Copyright Cengage Learning. Powered by Cognero.

$90,000 45,000 $45,000 Page 77

Chapter 17 - Financial Statement Analysis Operating expenses Net income

15,000 $30,000

Number of shares of common stock Market price of common stock Dividends per share Cash provided by operations

6,000 $20 $1.00 $40,000

What is the return on stockholders’ equity? a. 7.3% b. 13.6% c. 20.5% d. 40.9% ANSWER:

RATIONALE:

Return on Stockholders’ Equity = Net Income/Average Total Stockholders’ Equity = $30,000/$220,000 = 13.6% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:13 PM

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Chapter 17 - Financial Statement Analysis 123. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$160,000 $10,000 20,000 $35

The company’s earnings per share on common stock is a. $13.33 b. $8.50 c. $7.50 d. $35.00 ANSWER:

RATIONALE:

Earnings per Share (EPS) on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding = ($160,000 – $10,000)/20,000 = $150,000/20,000 = $7.50 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:14 PM

Page 79

Chapter 17 - Financial Statement Analysis 124. The price-earnings ratio on common stock is calculated as a. market price per share of common stock, divided by earnings per share on common stock b. earnings per share of common stock, divided by market price per share of common stock c. market price per share of common stock, divided by dividends per share of common stock d. dividends per share of common stock, divided by earnings per share on common stock ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG - Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 9:30 AM 125. Dividend yield on common stock is calculated as a. dividends on common stock, divided by shares of common stock outstanding b. net income minus preferred dividends, divided by shares of common stock outstanding c. dividends per share of common stock, divided by earnings per share d. dividends per share of common stock, divided by market price per share of common stock ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG - Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 9:31 AM

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Chapter 17 - Financial Statement Analysis 126. Corporate annual reports typically do not contain a. management discussion and analysis b. an SEC statement expressing an opinion c. accompanying notes d. an auditor's report ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:15 PM 127. The independent auditor's report a. describes which financial statements are covered by the audit b. gives the auditor's opinion regarding the fairness of the financial statements c. summarizes what the auditor did d. states that the financial statements were presented on time ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:16 PM

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Chapter 17 - Financial Statement Analysis 128. The purpose of an audit is to a. determine whether or not a company is a good investment b. render an opinion on the fairness of the statements c. determine whether or not a company complies with corporate social responsibility d. determine whether or not a company is a good credit risk ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/1/2017 7:03 PM 129. Which of the following is required by the Sarbanes-Oxley Act? a. price-earnings ratio b. report on internal control c. vertical analysis d. common-sized statement ANSWER: POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 130. All of the following are typically included in the Management’s Discussion and Analysis in annual reports except a. explanations of any significant changes between the current and prior years’ financial statements b. management’s assessment of liquidity c. journal entries d. off-balance-sheet arrangements ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 7:19 AM 131. Which of the following would appear as an unusual item on the income statement? a. loss resulting from the sale of fixed assets b. gain resulting from the disposal of a segment of the business c. presentation of earnings per share d. stock split ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:18 PM

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Chapter 17 - Financial Statement Analysis 132. A loss on disposal of a segment would be reported on the income statement as a(n) a. administrative expense b. other expense c. deduction from income from continuing operations d. selling expense ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:20 PM 133. Which of the following is not an unusual item? a. a segment of the business being sold b. corporate income tax being paid c. a change from one accounting method to another acceptable accounting method d. closure of all outlet stores ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:18 PM

Page 84

Chapter 17 - Financial Statement Analysis 134. Which of the following is considered an unusual item affecting the prior period’s income statement? a. a change in accounting principles b. fixed asset impairments c. sale of company stores in Florida d. discontinued operations ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 7:22 AM 135. A loss due to a discontinued operation should be reported on the income statement a. above income from continuing operations b. without related tax effect c. below income from continuing operations d. as an operating expense ANSWER: POINTS: DIFFICULTY:

Page 85

Chapter 17 - Financial Statement Analysis 136. A change from one acceptable accounting method to another is reported a. on the statement of retained earnings, as a correction to the beginning balance b. on the income statement, below income from continuing operations c. on the income statement, above income tax expense d. through a retroactive restatement of prior period earnings ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:20 PM 137. Which of the following items should be classified as an unusual item on an income statement? a. gain on the retirement of a bond payable b. gain on a sale of a long-term investment c. loss due to a discontinued operation in Colorado d. selling treasury stock for more than the company paid for it ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:21 PM

Page 86

Chapter 17 - Financial Statement Analysis 138. Which of the following items appear on the corporate income statement before income from continuing operations? a. cumulative effect of a change in accounting principle b. income tax expense c. presentation of earnings per share d. loss on discontinued operations ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 7:29 AM Matching Match each definition that follows with the term (a–h) it defines. a. Solvency b. Leverage c. Times interest earned d. Horizontal analysis e. Vertical analysis f. Common-sized financial statements g. Current position analysis h. Profitability analysis DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCT.WARD.18.17-02 - 17-02 ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis

DATE MODIFIED: 3/2/2017 2:28 PM 139. A percentage analysis of increases and decreases in related items on comparative financial statements ANSWER: d POINTS: 1 140. Use debt to increase the return on an investment ANSWER: b POINTS: 1 141. An analysis of a company’s ability to pay its current liabilities ANSWER: g POINTS: 1 142. The percentage analysis of the relationship of each component in a financial statement to a total within the statement ANSWER: e POINTS: 1 143. A company's ability to make interest payments and repay debt at maturity ANSWER: a POINTS: 1 144. Focuses on a company’s ability to generate net income ANSWER: h POINTS: 1 145. Useful for comparing one company to another or to industry averages ANSWER: f POINTS: 1 146. Measures the risk that interest payments will not be made if earnings decrease ANSWER: c POINTS: 1 Match each ratio that follows to its use (items a–h). Items may be used more than once. a. Assess the profitability of the assets b. Assess how effectively assets are used c. Indicate the ability to pay current liabilities d. Indicate how much of the company is financed by debt and equity e. Indicate instant debt-paying ability f. Assess the profitability of the investment by common stockholders g. Indicate future earnings prospects h. Indicate the extent to which earnings are being distributed to common stockholders DIFFICULTY:

Moderate

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Chapter 17 - Financial Statement Analysis Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 2:28 PM 147. Price-earnings (P/E) ratio ANSWER: g POINTS: 1 148. Working capital ANSWER: c POINTS: 1 149. Return on total assets ANSWER: a POINTS: 1 150. Ratio of liabilities to stockholders’ equity ANSWER: d POINTS: 1 151. Quick ratio ANSWER: e POINTS: 1 152. Return on common stockholders’ equity ANSWER: f POINTS: 1 153. Current ratio ANSWER: c POINTS: 1 154. Asset turnover ratio ANSWER: b POINTS: 1

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Chapter 17 - Financial Statement Analysis 155. Dividends per share ANSWER: h POINTS: 1 156. Earnings per share (EPS) on common stock ANSWER: f POINTS: 1 Subjective Short Answer 157. Cash and accounts receivable for Adams Company are provided below.

Cash Accounts receivable (net)

Current Year $70,000 70,400

Prior Year $50,000 80,000

What is the amount and percentage of increase or decrease that would be shown with horizontal analysis? Cash $20,000 increase ($70,000 – $50,000) or 40% Accounts receivable $9,600 decrease ($80,000 – $70,400) or (12%) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 4:49 PM ANSWER:

Page 90

Chapter 17 - Financial Statement Analysis 158. The following items were taken from the financial statements of Tilden, Inc., over a three-year period: Item Sales Cost of goods sold Gross profit

Year 3 $360,000 225,000 $135,000

Year 2 $335,000 205,000 $130,000

Year 1 $290,000 185,000 $105,000

Compute the following for each of the items listed. (a) The amount and percentage change from Year 2 to Year 3. (b) The amount and percentage change from Year 1 to Year 2. Round percentages to one decimal place. ANSWER: (a) Year 2 to 3 Amount Percent $25,000 7.5% 20,000 9.8 $ 5,000 3.8

Sales Cost of goods sold Gross profit POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 4:49 PM

(b) Year 1 to 2 Amount Percent $45,000 15.5% 20,000 10.8 $25,000 23.8

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Chapter 17 - Financial Statement Analysis 159. Comparative information taken from Friction Company's financial statements is shown below.

(a) (b) (c) (d) (e) (f)

Year 2 $ 25,500 106,200 77,000 654,000 160,000 28,000

Notes receivable Accounts receivable Retained earnings Sales Operating expenses Income taxes payable

Year 1 $ 30,000 90,000 70,000 600,000 200,000 20,000

Using horizontal analysis, show the percentage change and direction (increase or decrease) from Year 1 to Year 2 with Year 1 as the base year. (a) $4,500/$30,000 = 15% decrease (b) $16,200/$90,000 = 18% increase (c) $7,000/$70,000 = 10% increase (d) $54,000/$600,000 = 9% increase (e) $40,000/$200,000 = 20% decrease (f) $8,000/$20,000 = 40% increase POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 4:51 PM ANSWER:

160. Revenue and expense data for Young Technologies Inc. are as follows: Year 2 $500,000 325,000 70,000 75,000 10,500

Sales Cost of goods sold Selling expenses Administrative expenses Income tax expense (a) (b)

Year 1 $440,000 242,000 79,200 70,400 16,400

Prepare an income statement in comparative form, stating each item for both years as an amount and as a percent of sales. Round to the nearest whole percent. Comment on the significant changes disclosed by the comparative income statement.

ANSWER:

(a) Young Technologies Inc. Comparative Income Statement For the Years Ended December 31, Year 2 and Year 1

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Chapter 17 - Financial Statement Analysis

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total expenses Income from operations Income tax expense Net income

Year 2 Amount Percent $500,000 100% 325,000 65 $175,000 35% $ 70,000 14% 75,000 15 $145,000 29% $ 30,000 6% 10,500 2 $ 19,500 4%

Year 1 Amount Percent $440,000 100% 242,000 55 $198,000 45% $ 79,200 18% 70,400 16 $149,600 34% $48,400 11% 16,400 4 $ 32,000 7%

(b) The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 10% (65% vs. 55%) between the two years. Selling and administrative expenses as a percentage of sales decreased by 5%, and income tax expense decreased by 2%. Overall, net income as a percent of sales dropped by 3%.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 9:48 AM

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Chapter 17 - Financial Statement Analysis 161. Cash and accounts receivable for Ashfall Co. are provided below.

Cash Accounts receivable (net)

Current Year $62,400 42,000

Prior Year $58,000 50,000

Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis? Round percentages to one decimal place. Cash $4,400 increase ($62,400 – $58,000) or 7.6% Accounts receivable $8,000 decrease ($42,000 – $50,000) or (16%) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:07 PM ANSWER:

162. Income statement information for Lucy Company is provided below. Sales Cost of goods sold Gross profit

$175,000 105,000 $ 70,000

Prepare a vertical analysis of the income statement for Lucy Company. ANSWER:

Amount Percentage $175,000 100% 105,000 60 $ 70,000 40%

Sales ($175,000/$175,000) Cost of goods sold ($105,000/$175,000) Gross profit ($70,000/$175,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 4:53 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis 163. Why would you or why wouldn’t you compare an organization like Ford Motor Company to the local car dealer “Johnson City Ford/Lincoln/Mercury” using vertical and horizontal analysis? ANSWER:

Ford Motor Company is an automobile manufacturer with many aspects within the overall company such as military sales, foundries, and credit and financing operations, and its car sales are usually limited to resellers or large fleet purchasers. Johnson City Ford/Lincoln/Mercury is a local reseller that does not have the diverse operations of Ford Motor Company. Most of its sales, which would include new and used vehicles, would be to ultimate consumers and to smaller fleet operations. Major revenues may come from repairs and upgrades of vehicles. Its “credit” department may actually be a representative of another organization specializing in automobile financing.

While they both sell Ford cars, they are not comparable companies. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:08 PM 164. The balance sheet data below for Randolph Company for two recent years.

Current assets Plant assets Total assets

Assets

Year 2 $ 445 680 $1,125

Year 1 $280 520 $800

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

$ 285 255 325 260 $1,125

$120 160 320 200 $800

(a) Using horizontal analysis, show the percentage change for each balance sheet item using Year 1 as a base year. (b) Using vertical analysis, prepare a comparative balance sheet. Round percentages to one decimal place. Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis ANSWER: (a) Assets Current assets Plant assets Total assets

Increase(Decrease) Year 2 Year 1 Amount Percent $ 445 $280 $165 58.9% 680 520 160 30.8 $1,125 $800 $325 40.6

Liabilities & Stockholders' Equity Current liabilities $ 285 $120 Long-term debt 255 160 Common stock 325 320 Retained earnings 260 200 Total liabilities and stockholders' $1,125 $800 equity (b) Assets Current assets Plant assets Total assets

$165 95 5 60

137.5% 59.4 1.6 30.0

$325

40.6

Year 2 Year 1 Amount Percent Amount Percent $ 445 39.6% $280 35.0% 680 60.4 520 65.0 $1,125 100.0% $800 100.0%

Liabilities & Stockholders' Equity Current liabilities $ 285 Long-term debt 255 Common stock 325 Retained earnings 260 Total liabilities and stockholders' $1,125 equity

25.3% 22.7 28.9 23.1

$120 160 320 200

15.0% 20.0 40.0 25.0

100.0%

$800

100.0%

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:22 AM 165. Condensed data taken from the ledger of St. Louis Company at December 31, for the current and preceding years, are as follows:

Current assets Property, plant, and equipment Intangible assets Copyright Cengage Learning. Powered by Cognero.

Year 2 $160,000 450,000 20,700

Year 1 $130,000 400,000 30,000 Page 96

Chapter 17 - Financial Statement Analysis Current liabilities Long-term liabilities Common stock Retained earnings

70,000 210,000 225,000 125,700

80,000 250,000 150,000 80,000

Prepare a comparative balance sheet, with horizontal analysis, for December 31, Year 2 and Year 1. (Round percents to one decimal place.) ANSWER: St. Louis Company Comparative Balance Sheet December 31, Year 2 and Year 1

Year 2 Assets Current assets Property, plant, and equipment Intangible assets Total assets

Increase (Decrease) Year 1 Amount Percent

$160,000 $130,000 $ 30,000 23.1% 450,000 400,000 50,000 12.5% 20,700 30,000 (9,300) (31.0%) $630,700 $560,000 $ 70,700 12.6%

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

$ 70,000 $ 80,000 $(10,000) (12.5%) 210,000 250,000 (40,000) (16.0%) $280,000 $330,000 $(50,000) (15.2%) $225,000 $150,000 $ 75,000 125,700 80,000 45,700 $350,700 $230,000 $120,700

50.0% 57.1% 52.5%

$630,700 $560,000 $ 70,700

12.6%

POINTS: DIFFICULTY:

Year 1 Page 97

Chapter 17 - Financial Statement Analysis Administrative expenses Cost of goods sold Income tax Sales Selling expenses

$ 37,000 350,000 40,000 800,000 150,000

$ 20,000 320,000 32,000 700,000 110,000

(a) Prepare a comparative income statement, with vertical analysis, stating each item for both years as a percent of sales. (b) Comment on significant changes disclosed by the comparative income statement. Round percentages to one decimal place. ANSWER:

(a) Bluestem Company Comparative Income Statement For Years Ended December 31, Year 2 and Year 1

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income tax Income tax Net income

Year 2 Amount Percent $800,000 100.0% 350,000 43.8 $450,000 56.2% $150,000 18.8% 37,000 4.6 $187,000 23.4% $263,000 32.8% 40,000 5.0 $223,000 27.8%

Year 1 Amount Percent $700,000 100.0% 320,000 45.7 $380,000 54.3 $110,000 15.7% 20,000 2.9 $130,000 18.6 $250,000 35.7% 32,000 4.6 $218,000 31.1

(b) There was a 1.9% decrease in the cost of goods sold, and a 1.7% increase in administrative expenses. However, the more significant increase of 3.1% in selling expenses offset the 1.9% decrease in cost of goods sold and contributed greatly to the 3.3% decrease in net income. POINTS: DIFFICULTY:

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Chapter 17 - Financial Statement Analysis 167. What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analyses? ANSWER:

When percentages are utilized rather than dollars, companies that are not the same size can be compared. If Carbondale Chemicals is a $10 billion per year sales company and Heartland Chemicals is a $500 million per year sales company, these two companies can still be compared by using percentages determined by the analysis. These companies' results can also be compared to industry averages. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:09 PM

Page 99

Chapter 17 - Financial Statement Analysis 168. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable

$230,000 50,000 200,000 240,000 300,000

Determine the (a) current ratio and (b) quick ratio. Round your answers to one decimal place.

ANSWER:

(a) Current Ratio = Current Assets (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities (Accounts Payable) Current Ratio = ($230,000 + $50,000 + $200,000 + $240,000)/$300,000 Current Ratio = 2.4 (b) Quick Ratio = Quick Assets (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities (Accounts Payable) Quick Ratio = ($230,000 + $50,000 + $200,000)/$300,000 Quick Ratio = 1.6

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:27 AM

Page 100

Chapter 17 - Financial Statement Analysis 169. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable

$400,000 50,000 150,000 200,000 250,000

Determine the (a) current ratio, and (b) quick ratio. Round your answers to one decimal place.

ANSWER:

(a) Current Ratio = Current Assets (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities (Accounts Payable) Current Ratio = ($400,000 + $50,000 + $150,000 + $200,000)/$250,000 Current Ratio = 3.2

(b) Quick Ratio = Quick Assets (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities (Accounts Payable) Quick Ratio = ($400,000 + $50,000 + $150,000)/$250,000 Quick Ratio = 2.4 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 4:57 PM

Page 101

Chapter 17 - Financial Statement Analysis 170. The following items are reported on Denver Company’s balance sheet: Cash Marketable securities Accounts receivable (net) Inventory Accounts payable

$190,000 160,000 240,000 350,000 600,000

Determine the (a) current ratio and (b) quick ratio. Round your answers to one decimal place. ANSWER:

(a)

Current Ratio = Current Assets/Current Liabilities Current Ratio = ($190,000 + $160,000 + $240,000 + $350,000)/$600,000 Current Ratio = 1.6

(b)

Quick Ratio = Quick Assets/Current Liabilities Quick Ratio = ($190,000 + $160,000 + $240,000)/$600,000 Quick Ratio = 1.0

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:29 AM

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Chapter 17 - Financial Statement Analysis 171. For Garrison Corporation, the working capital at the end of the current year is $10,000 more than the working capital at the end of the preceding year, reported as follows:

Current assets: Cash, marketable securities, and receivables Inventories Total current assets Current liabilities Working capital

Year 2

Year 1

$ 80,000 120,000 $200,000 100,000 $100,000

$ 84,000 66,000 $150,000 60,000 $ 90,000

Has the current position of Garrison Corporation improved? Explain. ANSWER:

The amount of working capital and the change in working capital are just two indicators of the strength of the current position. A comparison of the current and quick ratios, along with the amount of working capital, gives a better analysis of the current position.

Working capital Current ratio Quick ratio

Year 2 $100,000 2.0 0.8

Year 1 $90,000 2.5 1.4

Although working capital has increased, the current ratio has fallen from 2.5 to 2.0, and the quick ratio has fallen from 1.4 to 0.8. Reductions in the current and quick ratios imply that it has become difficult for the company to convert its assets into cash to pay off its short-term liabilities, so the current position has deteriorated. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/2/2017 5:51 PM

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Chapter 17 - Financial Statement Analysis 172. A company reports the following: Sales Average accounts receivable (net)

$720,000 45,000

Determine the (a) accounts receivable turnover and (b) number of days’ sales in receivables. Round your answers to one decimal place. ANSWER:

(a)

Accounts Receivable Turnover = Sales/Average Accounts Receivable Accounts Receivable Turnover = $720,000/$45,000 Accounts Receivable Turnover = 16.0

(b)

Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Dail Sales Number of Days’ Sales in Receivables = $45,000/($720,000/365) Number of Days’ Sales in Receivables = 22.8

POINTS: DIFFICULTY:

Page 104

Chapter 17 - Financial Statement Analysis 173. A company reports the following: Sales Average accounts receivable (net)

$1,200,000 50,000

Determine the (a) accounts receivable turnover and (b) number of days’ sales in receivables. Round your answers to one decimal place. ANSWER:

(a) Accounts Receivable Turnover = Sales/Average Accounts Receivable Accounts Receivable Turnover = $1,200,000/$50,000 Accounts Receivable Turnover = 24.0

(b) Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Daily Sales Number of Days’ Sales in Receivables = $50,000/($1,200,000/365) Number of Days’ Sales in Receivables = 15.2 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:00 PM

Page 105

Chapter 17 - Financial Statement Analysis 174. A company reports the following: Cost of goods sold Average inventory

$610,000 80,000

Determine the (a) inventory turnover and (b) number of days’ sales in inventory. Round your answers to one decimal place. ANSWER:

(a) Inventory Turnover = Cost of Goods Sold/Average Inventory Inventory Turnover = $610,000/$80,000 Inventory Turnover = 7.6

Number of Days’ Sales in Inventory = Average Inventory/Average Daily Cost (b) of Goods Sold Number of Days’ Sales in Inventory = $80,000/($610,000/365) Number of Days’ Sales in Inventory = 47.9 days POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:01 PM 175. The following data are available for Martin Solutions, Inc.: Year 2 Sales $1,139,600 Beginning inventory 80,000 Cost of goods sold 500,800 Ending inventory 72,000

Year 1 $1,192,320 64,000 606,000 80,000

(1) Determine for each year: (a) Inventory turnover (b) Number of days’ sales in inventory (Round intermediate calculation to the nearest whole number and your final answer to one decimal place.) (2) What conclusions can be drawn from these data concerning the inventories? ANSWER:

(1) (a) Inventory Turnover = Cost of Goods Sold/Average Inventory Year 2 $500,800 ($72,000 + $80,000)/2

= 6.6

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Chapter 17 - Financial Statement Analysis Year 1

$606,000 ($80,000 + $64,000)/2

= 8.4

(b) Number of Days’ Sales in Inventory = Average Inventory/ Average Daily Cost of Goods Sold Year 2

($72,000 + $80,000)/2 $1,372*

= 55.4

Year 1

($80,000 + $64,000)/2 $1,660**

= 43.4

*$1,372 = $500,800/365 days **$1,660 = $606,000/365 days (2)

The inventory position of the business has deteriorated. The inventory turnover has decreased, while the number of days’ sales in inventory has increased. The sales volume has declined faster than the inventory has declined, thus resulting in the deteriorating inventory position.

POINTS: DIFFICULTY:

Page 107

Chapter 17 - Financial Statement Analysis 176. The following data are taken from the balance sheet at the end of the current year: Cash Accounts receivable Inventory Prepaid expenses Temporary investments Property, plant, and equipment Accounts payable Accrued liabilities Income tax payable Notes payable, short-term

$154,000 210,000 240,000 15,000 350,000 375,000 245,000 4,000 10,000 85,000

Determine the (a) working capital, (b) current ratio, and (c) quick ratio. Round ratios to one decimal place. (a) Current Assets ($969,000) – Current Liabilities ($344,000) = $625,000 (b) Current Assets ($969,000)/Current Liabilities ($344,000) = 2.8 (c) Cash + Temporary Investments + Accounts Receivable ($714,000)/Current Liabilities ($344,000) = 2.1 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 9:11 PM ANSWER:

Page 108

Chapter 17 - Financial Statement Analysis 177. The following data are taken from the financial statements:

Average accounts receivable (net) Accounts receivable (net), end of year Sales on account

Current Year Preceding Year $123,000 $ 95,000 129,012 87,516 950,000 825,000

(a) Assuming that credit terms on all sales are n/45, determine for each year: (1) Accounts receivable turnover (2) Number of days’ sales in receivables (Round intermediate calculation to the nearest whole number and your final answer to two decimal places.) (b) Comment on any significant trends revealed by the data. ANSWER:

(a) Current Year Preceding Year (1)

(2)

Sales on Account/Average Accounts Receivable (net)

7.72

8.68

Average Accounts Receivable/ Average Daily Sales on Account*

47.25

42.04

*Current: $950,000/365 = $2,603 Preceding: $825,000/365 = $2,260 (b)

Although sales increased during the current year, a favorable trend, several unfavorable trends are disclosed by the analysis. The accounts receivable turnover has declined from 8.68 in the preceding year to 7.72 in the current year. Based on credit terms of n/45, a turnover of less than 8 indicates that some receivables are not being collected within the 45-day period. Likewise, the number of days' sales in receivables indicates an unfavorable trend, increasing from 42.04 at the end of the preceding year to 47.25 at the end of the current year.

POINTS: DIFFICULTY:

Page 109

Chapter 17 - Financial Statement Analysis 178. The following data are taken from the financial statements: Current Year $3,600,000 2,000,000 372,000 372,000

Sales Cost of goods sold Average inventory Inventory, end of year

Preceding Year $4,000,000 2,700,000 352,000 347,000

(a) Determine for each year: (1) Inventory turnover (Round answer to one decimal place.) (2) Number of days’ sales in inventory (Round intermediate calculation to the nearest whole number and your final answer to two decimal places.) (b) Comment on the favorable and unfavorable trends revealed by the data. ANSWER:

(a)

(1)

Cost of Goods Sold/Average Inventory

(2)

Average Inventory/Average Daily Cost of Goods Sold* *Average Daily Cost of Goods Sold (Cost of Goods Sold ÷ 365 days)

Current Year 5.4

Preceding Year 7.7

67.90

45.59

5,479 days 7,397 days

(b) Sales decreased while gross profit increased. The inventory turnover declined and the number of days' sales in inventory increased, which are unfavorable trends.

POINTS: DIFFICULTY:

Page 110

Chapter 17 - Financial Statement Analysis 179. The following information was taken from Slater Company’s balance sheet: Fixed assets (net) Long-term liabilities Total liabilities Total stockholders’ equity

$1,250,000 500,000 672,000 1,680,000

Determine the company’s (a) ratio of fixed assets to long-term liabilities and (b) ratio of liabilities to stockholders’ equity. Round your answers to one decimal place. (a) ANSWER:

(b)

Ratio of Fixed Assets to Long-Term Liabilities = Fixed Assets/Long-Term Liabilities Ratio of Fixed Assets to Long-Term Liabilities = $1,250,000/$500,000 Ratio of Fixed Assets to Long-Term Liabilities = 2.5 Ratio of Liabilities to Stockholders' Equity = Total Liabilities/Total Stockholders’ Equity Ratio of Liabilities to Stockholders' Equity = $672,000/$1,680,000 Ratio of Liabilities to Stockholders' Equity = 0.4

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:40 AM

Page 111

Chapter 17 - Financial Statement Analysis 180. A company reports the following: Income before income tax Interest expense

$600,000 150,000

Determine the times interest earned. Round your answer to one decimal place. ANSWER:

Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense Times Interest Earned = ($600,000 + $150,000)/$150,000 Times Interest Earned = 5.0 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:05 PM 181. The balance sheet for Seuss Company at the end of the current fiscal year indicated the following: Bonds payable, 10% (20-year term) Preferred 10% stock, $100 par Common stock, $10 par

$5,000,000 1,000,000 2,000,000

Income before income tax was $1,500,000, and income taxes were $200,000 for the current year. Cash dividends paid on common stock during the current year totaled $150,000. The common stock sells for $75 per share at the end of the year. Determine each of the following: (a) Times interest earned (b) Earnings per share on common stock (c) Price-earnings ratio (d) Dividends per share of common stock (e) Dividend yield Round to one decimal place except earnings per share and dividends per share, which should be rounded to two decimal places. ANSWER:

(a) Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense ($1,500,000 + $500,000)/$500,000 = 4.0 times (b) Earnings per Share on Common Stock = (Net Income – Preferred

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Chapter 17 - Financial Statement Analysis Dividends)/Common Shares Outstanding ($1,300,000 – $100,000)/200,000 shares = $6.00 (c) Price-Earnings Ratio = Market Price per Share/Earnings per Share $75.00/$6.00 = 12.5 (d) Dividends per Share of Common Stock = Common Dividends/Common Shares Outstanding $150,000/200,000 shares = $0.75 (e) Dividend Yield = Common Dividend per Share/Share Price $0.75/$75.00 = 1% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:06 PM 182. Define solvency and profitability. How are they alike? ANSWER:

Solvency is the ability of a company to meet its financial obligations (debts) as they become due. Profitability is the ability of a company to earn income. They are interrelated because a company that cannot pay its debts will have difficulty obtaining credit. A lack of credit can prevent a company from taking actions (i.e., expansion) that would increase profitability. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 2:27 PM 183. The following information has been condensed from the December 31 balance sheets of Gabriel Co.: Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis

Assets: Current assets Fixed assets (net) Total assets Liabilities: Current liabilities Long-term liabilities Total liabilities Stockholders' equity Total liabilities and stockholders' equity

Year 2

Year 1

$ 825,500 1,473,600 $2,299,100

$ 674,300 1,275,300 $1,949,600

$ 313,500 703,000 $1,016,500 $1,282,600

$ 309,600 545,000 $ 854,600 $1,095,000

$2,299,100

$1,949,600

(a) Determine the ratio of fixed assets to long-term liabilities for each year. (b) Determine the ratio of liabilities to stockholders' equity for each year. (c) Comment on the year-to-year changes for both ratios. Round your answers to two decimal places. ANSWER:

(a) Ratio of fixed assets to long-term liabilities (b) Ratio of liabilities to stockholders' equity

Year 2

Year 1

2.10

2.34

0.79

0.78

(c) In the second year, the margin of safety to creditors is lower. There are fewer fixed assets on a proportionate basis to protect the interests of the long-term creditors than in the first year. Also, the ratio of liabilities to stockholders’ equity has risen slightly in the second year, which indicates that more of the company is financed by debt and equity. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:58 AM

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Chapter 17 - Financial Statement Analysis 184. A company reports the following: Sales Average total assets (excluding long-term investments)

$2,400,000 1,500,000

Determine the asset turnover ratio. Round your answer to one decimal place. ANSWER:

Asset Turnover Ratio = Sales/Average Total Assets Asset Turnover Ratio = $2,400,000/$1,500,000 Asset Turnover Ratio = 1.6 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:08 PM 185. A company reports the following: Sales Average total assets (excluding long-term investments)

$2,520,000 1,400,000

Determine the asset turnover ratio. Round your answer to one decimal place. ANSWER:

Asset Turnover Ratio = Sales/Average Total Assets Asset Turnover Ratio = $2,520,000/$1,400,000 Asset Turnover Ratio = 1.8 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:42 AM

Page 115

Chapter 17 - Financial Statement Analysis 186. A company reports the following income statement and balance sheet information for the current year: Net income Interest expense Average total assets

$ 180,000 20,000 2,000,000

Determine the return on total assets. Round your answer to one decimal place. ANSWER:

Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Return on Total Assets = ($180,000 + $20,000)/$2,000,000 Return on Total Assets = $200,000/$2,000,000 Return on Total Assets = 10% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 2:42 PM

Page 116

Chapter 17 - Financial Statement Analysis 187. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$150,000 $10,000 20,000 $35

Calculate the company’s earnings per share on common stock.

ANSWER:

Earnings per Share on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding. Earnings per Share = ($150,000 – $10,000)/20,000 Earnings per Share = $7.00

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:10 PM

Page 117

Chapter 17 - Financial Statement Analysis 188. A company reports the following: Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity

$ 350,000 50,000 1,000,000 800,000

Determine the (a) return on stockholders’ equity and (b) return on common stockholders’ equity. Round your answers to one decimal place. ANSWER:

(a)

Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity Return on Stockholders’ Equity = $350,000/$1,000,000 Return on Stockholders’ Equity = 35.0%

(b)

Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/ Average Common Stockholders’ Equity Return on Common Stockholders’ Equity = ($350,000 – $50,000)/$800,000 Return on Common Stockholders’ Equity = 37.5%

POINTS: DIFFICULTY:

Page 118

Chapter 17 - Financial Statement Analysis 189. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$270,000 $10,000 20,000 $36.40

Calculate the company’s price-earnings ratio. Round your answer to one decimal place. ANSWER:

Price-Earnings Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding Earnings per Share = ($270,000 – $10,000)/20,000 Earnings per Share = $13.00

Price-Earnings Ratio = $36.40/$13.00 Price-Earnings Ratio = 2.8 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:45 AM 190. The following selected data were taken from the financial statements of the Winter Group for the three most recent years of operations:

Total assets Notes payable (10% interest) Common stock Preferred $6 stock, $100 par Retained earnings

Dec. 31, Year 3 $3,000,000 1,000,000 400,000 200,000 1,126,000

Dec. 31, Year 2 $2,700,000 1,000,000 400,000 200,000 896,000

Dec. 31, Year 1 $2,400,000 1,000,000 400,000 200,000 600,000

The Year 3 net income was $242,000, and the Year 2 net income was $308,000. No dividends on common stock were declared during the three years. (a)

Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for Years 2 and 3. Round to one decimal place.

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Chapter 17 - Financial Statement Analysis (b)

What conclusion can be drawn from these data as to the company's profitability?

ANSWER:

(a) Return on Total Assets = (Net Income + Interest Expense )/Average Total Assets Year 3: ($242,000 + $100,000)/$2,850,000* = 12.0% Year 2: ($308,000 + $100,000)/$2,550,000** = 16.0% *($3,000,000 + $2,700,000)/2 **($2,700,000 + $2,400,000)/2 Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity Year 3: $242,000/$1,611,000* = 15.0% Year 2: $308,000/$1,348,000** = 22.8% *($1,726,000 + $1,496,000)/2 **($1,496,000 + $1,200,000)/2 Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders’ Equity Year 3: ($242,000 – $12,000)/$1,411,000* = 16.3% Year 2: ($308,000 – $12,000)/$1,148,000** = 25.8% *($1,526,000 + $1,296,000)/2 **($1,296,000 + $1,000,000)/2 (b) The profitability ratios indicate that the Winter Group’s profitability has deteriorated. Most of this change is from net income falling from $308,000 in Year 2 to $242,000 in Year 3. The cost of debt is 10%. Since the return on total assets exceeds this amount in either year, there is positive leverage from use of debt. However, this leverage is greater in Year 2 because the return on total assets exceeds the cost of debt by a greater amount in Year 2.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:49 AM 191. Selected data from Carmen Company at year-end are presented below. Total assets Average total assets Net income Sales Copyright Cengage Learning. Powered by Cognero.

$2,000,000 $2,200,000 $250,000 $1,300,000 Page 120

Chapter 17 - Financial Statement Analysis Average common stockholders' equity Net cash provided by operating activities Shares of common stock outstanding Long-term investments

$1,000,000 $275,000 10,000 $400,000

Calculate: (a) Asset turnover ratio (b) Return on total assets (c) Return on common stockholders' equity (d) Earnings per share on common stock. Assume the company had no preferred stock or interest expense. Round dollar values to two decimal places and other final answers to one decimal place. ANSWER:

With the information provided, the profitability ratios that can be calculated are as follows: (a) Asset Turnover Ratio

= Sales/Average Total Assets (excluding long-term investments) = $1,300,000/($2,200,000 – $400,000) = 0.7

(b) Return on Total Assets

= (Net Income + Interest Expense)/Average Total Assets = ($250,000 + 0)/$2,200,000 = 11.4%

= $250,000/10,000 = $25.00 per share

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:14 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17 - Financial Statement Analysis

192. The following information was taken from the financial statement of Fox Resources for December 31 of the current fiscal year: Common stock, $20 par value (no change during the year) Preferred 10% stock, $40 par (no change during the year)

$5,000,000 2,000,000

The net income was $600,000, and the declared dividends on the common stock were $125,000 for the current year. The market price of the common stock is $20 per share. Calculate for the common stock: (a) Earnings per share (b) Price-earnings ratio (c) Dividends per share and dividend yield Round to one decimal place except earnings per share, which should be rounded to two decimal places.

ANSWER:

(a) Earnings per Share = (Net Income – Preferred Dividends)/Common Shares Outstanding = ($600,000 – $200,000)/250,000 shares = $1.60 (b) Price-Earnings Ratio = Market Price per Share/Earnings per Share = $20.00/$1.60 = 12.5 (c) Dividends per Share = Common Dividends/Common Shares Outstanding = $125,000/250,000 shares = $0.50 Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $0.50/$20.00 = 2.5%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 3:32 PM 193. The following data are taken from the financial statements:

Current assets Property, plant, and equipment Current liabilities (non-interest-bearing) Long-term liabilities, 12% Preferred 10% stock Copyright Cengage Learning. Powered by Cognero.

Current Year $ 745,000 1,510,000

Preceding Year $ 820,000 1,400,000

160,000 400,000 250,000

140,000 400,000 250,000 Page 122

Chapter 17 - Financial Statement Analysis Common stock, $25 par Retained earnings, beginning of year Net income for year Preferred dividends declared Common dividends declared

1,200,000

230,000 110,000 (25,000) (70,000)

160,000 155,000 (25,000) (60,000)

Determine for the current year: (a) Return on total assets (b) Return on stockholders' equity (c) Return on common stockholders' equity (d) Earnings per share on common stock (e) Price-earnings ratio on common stock (f) Dividend yield The current market price per share of common stock is $25. Round dollar values to two decimal places and other final answers to one decimal place. ANSWER: (Net Income + Interest Expense)/Average Total Assets ($110,000 + $48,000)/[($2,255,000 + = $2,220,000)/2] = $158,000/$2,237,500 = 7.1%

(a) Return on Total Assets

(b)

Return on Stockholders'

Equity

Net Income/Average Stockholders' Equity $110,000/[($1,680,000 + $1,610,000)/2] $110,000/$1,645,000

= 6.7%

(c)

Return on Common Stockholders' Equity

($110,000 – $25,000)/[($1,430,000 + $1,360,000)/2]

= $85,000/$1,395,000 = 6.1%

(d)

Earnings per Share on Common Stock Page 123

Chapter 17 - Financial Statement Analysis = ($110,000 – $25,000)/48,000 = $85,000/48,000 = $1.77

(e)

Price-Earnings Ratio on Common Stock

Market Price per Share of = Common Stock/Earnings per Share of Common Stock = $25/$1.77 = 14.1% Dividends per Share of Common

(f) Dividend Yield

= Stock/Market Price per Share of Common Stock = $1.46/$25 = 5.8%

POINTS: DIFFICULTY:

Page 124

Chapter 17 - Financial Statement Analysis 194. Abigail Company reports the following: Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity

$ 295,000 30,000 1,000,000 700,000

Determine the (a) return on stockholders’ equity and (b) return on common stockholders’ equity. Round your answers to one decimal place. ANSWER:

(a)

Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity Return on Stockholders’ Equity = $295,000/$1,000,000 Return on Stockholders’ Equity = 29.5%

(b)

Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders' Equity Return on Common Stockholders’ Equity = ($295,000 – $30,000)/$700,000 Return on Common Stockholders’ Equity = 37.9%

POINTS: DIFFICULTY:

Page 125

Chapter 17 - Financial Statement Analysis 195. Gallant Company reported net income of $2,500,000. The income statement included a $200,000 loss on discontinued operations, after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. Prepare the earnings per share section of Gallant Company’s income statement. Earnings per common share: Income from continuing operations* Loss on discontinued operations ($200,000/ 100,000 shares) Net income

ANSWER:

*Net income Loss on discontinued operations Income from continuing operations

$25.40 (2.00) $23.40

$2,500,000 200,000 $2,700,000

Earnings per Share on Common Stock = (Income from Continuing Operations – Preferred Dividends)/ Common Shares Outstanding = ($2,700,000 – $160,000)/100,000 shares = $25.40 per share POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:52 AM 196. Zeus Company reports the following for the current year: Income from continuing operations before income tax Loss from discontinued operations Weighted average number of common shares outstanding Applicable tax rate *Net of any tax effect

$500,000 $90,000* 40,000 40%

(a) Prepare a partial income statement for Zeus Company beginning with income from continuing operations before income tax. (b) Calculate the earnings per common share for Zeus. Copyright Cengage Learning. Powered by Cognero.

Page 126

Chapter 17 - Financial Statement Analysis ANSWER:

(a) Zeus Company Partial Income Statement For the Year Ended December 31 Income from continuing operations before income tax Income tax expense Income from continuing operations Loss from discontinued operations (net of tax) Net income

$500,000 200,000 $300,000 90,000 $210,000

(b) Zeus Company Partial Income Statement For the Year Ended December 31 Earnings per common share: Income from continuing operations

$7.501

Loss from discontinued operations Net income

2.252 $5.25

1$7.50 = $300,000 ÷ 40,000 shares 2$2.25 = $90,000 ÷ 40,000 shares

POINTS: DIFFICULTY:

Page 127

Chapter 17 - Financial Statement Analysis 197. Rho, Sigma, and Tau companies have the following data for the current year:

Price-earnings ratio

Rho Company 23.7

Sigma Company 16.9

Tau Company 30.1

Which company would be expected to have the best potential for future common stock price appreciation? ANSWER:

The price-earnings (P/E) ratio on common stock measures a company’s future earnings prospects. Therefore, Tau Company, with the highest P/E ratio, would be expected to have the best potential for future common stock price appreciation. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:18 PM

Page 128

Chapter 17 - Financial Statement Analysis 198. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income

$125,000 $115 5,000 $65,000 600 $102 $25 $575,000

What is CorpCo's dividend yield? Write your answer as a percent, rounded to one decimal place. ANSWER:

CorpCo's dividend yield is 21.7%, calculated as follows:

Dividends per Share of Common Stock/Market Price per Share of Common Stock = $25/$115 = 21.7% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/3/2017 5:19 PM

Page 129

Chapter 17 - Financial Statement Analysis 199. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income

$125,000 $115 5,000 $65,000 600 $102 $25 $575,000

What is CorpCo's price-earnings ratio? Round your answer to one decimal place. ANSWER:

CorpCo's price-earnings ratio is 1.1, calculated as follows:

Market Price per Share of Common Stock/Earnings per Share of Common Stock = $115/$102 = 1.1 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic DATE CREATED: 3/3/2017 4:40 PM DATE MODIFIED: 3/3/2017 5:19 PM

Page 130

Chapter 17 - Financial Statement Analysis 200. What information is generally included in the Management's Discussion and Analysis (MD&A) section of a corporate annual report? ANSWER:

The MD&A section typically includes: Management’s analysis and explanations of any significant changes between the current and prior years’ financial statements. Important accounting principles or policies that could affect interpretation of the financial statements, including the effect of changes in accounting principles or the adoption of new principles. Management’s assessment of the company’s liquidity and the availability of capital to the company. Significant risk exposures that might affect the company. Any “off-balance-sheet” arrangements such as leases not included directly on the financial statements.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:54 AM

Page 131

Chapter 17 - Financial Statement Analysis 201. Prepare an income statement using the following data for New Orleans Adventures for the year ended December 31: Sales Cost of goods sold Operating expenses Income tax expense Loss on discontinued operations

$24,500,000 10,900,000 6,300,000 500,000 100,000

ANSWER: New Orleans Adventures Income Statement For the Year Ended December 31 Sales Cost of goods sold Gross profit Operating expenses Income from continuing operations before income tax Income tax expense Income from continuing operations Loss on discontinued operations Net income

$24,500,000 10,900,000 $13,600,000 6,300,000 $ 7,300,000 500,000 $ 6,800,000 100,000 $ 6,700,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DATE CREATED: 1/31/2017 4:49 PM DATE MODIFIED: 3/7/2017 10:56 AM

Page 132

Chapter 18 - Introduction to Managerial Accounting True / False 1. Managerial accounting reports must be prepared according to generally accepted accounting principles. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 2. Managerial accounting uses only past data in reports to aid management in the decision-making process. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 18 - Introduction to Managerial Accounting 3. Managerial accounting information includes both historical and estimated data. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 4. Since there are few rules to restrict how an organization chooses to arrange its own internal data for decision making, managerial accounting provides ample opportunity for creativity and change. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 18 - Introduction to Managerial Accounting 5. A diagram of the operating structure of an organization is called an organization chart. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 6. In most business organizations, the chief accountant is called the treasurer. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 18 - Introduction to Managerial Accounting 7. In most business organizations, the chief management accountant is called the controller. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:29 PM 8. A staff department or unit is one that provides services, assistance, and advice to the departments with line or other staff responsibilities. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 18 - Introduction to Managerial Accounting 9. The vice presidents of production and sales and the controller hold line positions in most large organizations. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 10. A staff department has no direct authority over a line department. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 18 - Introduction to Managerial Accounting 11. The controller's staff consists of management accountants responsible for systems and procedures, general accounting, budgets, taxes, and cost accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 12. Managerial accounting reports must be useful to the user of the information. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 18 - Introduction to Managerial Accounting 13. Planning is the process of monitoring operating results and comparing actual results with the expected results. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 14. Planning is the process of developing the company’s objectives or goals and translating these objectives into courses of action. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 18 - Introduction to Managerial Accounting 15. Controlling deals with choosing goals and deciding how to achieve them. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 16. Controlling is the process of monitoring operating results and comparing actual results with the expected results. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 18 - Introduction to Managerial Accounting 17. Managers use managerial information to evaluate performance of a company’s operation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:52 PM 18. Managerial information is for external as well as internal stakeholders. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:31 PM

Page 9

Chapter 18 - Introduction to Managerial Accounting 19. A report analyzing how many products need to be sold to cover operating costs is not typically a managerial accounting report. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:56 PM 20. A report analyzing the dollar savings of purchasing new equipment to speed up the production process is a managerial accounting report. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 18 - Introduction to Managerial Accounting 21. A performance report that identifies the amount of employee downtime is a financial accounting report. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:00 PM 22. Managerial accounting provides useful information to managers on product costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 11

Chapter 18 - Introduction to Managerial Accounting 23. The payment of dividends is an example of a cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 24. A cost can be a payment of cash for the purpose of generating revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM

Page 12

Chapter 18 - Introduction to Managerial Accounting 25. Goods that are part way through the manufacturing process, but not yet complete, are referred to as materials inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:32 PM 26. The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 18 - Introduction to Managerial Accounting 27. The cost of materials entering directly into the manufacturing process is classified as factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 28. The cost of wages paid to employees directly involved in converting materials to finished product is classified as direct labor cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 18 - Introduction to Managerial Accounting 29. If the cost of employee wages is not a significant portion of the total product cost, the wages are classified as direct materials cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 30. For a construction contractor, the wages of carpenters would be classified as factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:01 PM

Page 15

Chapter 18 - Introduction to Managerial Accounting 31. For an automotive repair shop, the wages of mechanics would be classified as direct labor cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:02 PM 32. Costs other than direct materials cost and direct labor cost incurred in the manufacturing process are classified as factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 18 - Introduction to Managerial Accounting 33. Depreciation on factory plant and equipment is an example of factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:04 PM 34. Cost of oil used to lubricate factory machinery and equipment is an example of a direct materials cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 18 - Introduction to Managerial Accounting 35. If the cost of materials is not a significant portion of the total product cost, the materials may be classified as part of factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:11 PM 36. Factory overhead cost is sometimes referred to as factory burden. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 37. Conversion cost is the combination of direct labor cost and factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 38. Conversion cost is the combination of direct materials cost and factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 39. Factory overhead is an example of a product cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:12 PM 40. Direct labor costs are included in the conversion costs of a product. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 41. The costs of materials and labor that do not enter directly into the finished product are classified as factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:14 PM 42. The costs of materials and labor that do not enter directly into the finished product are classified as cost of goods sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:15 PM

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Chapter 18 - Introduction to Managerial Accounting 43. Indirect labor would be included in factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:16 PM 44. A cost object indicates how costs are related or identified. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 45. Direct costs can be specifically traced to a cost object. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 46. Indirect costs can be specifically traced to a cost object. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 47. Period (nonmanufacturing) costs are classified into two categories: selling and administrative. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:34 PM 48. Prime costs are the combination of direct labor costs and factory overhead costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 49. Prime costs are the combination of direct materials and direct labor costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 50. Conversion costs are the combination of direct labor, direct material, and factory overhead costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 51. Manufacturers use machinery and labor to convert direct materials into finished products. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:35 PM 52. Period costs include direct materials and direct labor. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 53. Period costs can be found on both the balance sheet and the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:35 PM 54. Product costs are not expensed until the product is sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 55. The plant manager’s salary in a manufacturing business would be considered an indirect cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:18 PM 56. Operating expenses are product costs and are expensed when the product is sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 57. Period costs are operating costs that are expensed in the period in which the goods are sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 58. Factory overhead includes all manufacturing costs except direct materials and direct labor. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 59. Labor costs that are directly traceable to the product are part of factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 60. Product costs include direct labor and advertising expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 61. Indirect labor and indirect materials would be part of factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 62. Prime costs consist of factory overhead and direct labor. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 63. Conversion costs consist of product costs and period costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 64. Prime costs consist of direct materials, indirect materials, and direct labor. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 65. Sustainability practice focuses on short-term solutions to sustain company profits. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-03 - 18-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/3/2017 6:22 PM DATE MODIFIED: 3/3/2017 6:36 PM 66. An example of an eco-efficiency measure would be cost savings generated by recycling. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-03 - 18-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/3/2017 6:24 PM DATE MODIFIED: 3/3/2017 6:38 PM

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Chapter 18 - Introduction to Managerial Accounting 67. The Sustainability Accounting Standards Board (SASB) standards are required, just as GAAP standards are required. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-03 - 18-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/3/2017 6:26 PM DATE MODIFIED: 3/3/2017 6:38 PM 68. Only the value of the inventory that is sold will appear on the income statement. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:20 PM

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Chapter 18 - Introduction to Managerial Accounting 69. On the balance sheet for a manufacturing business, the cost of direct materials, direct labor, and factory overhead are categorized as either materials inventory, work in process inventory, or finished goods inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 6:21 PM 70. The statement of cost of goods manufactured is an extension of the income statement for a manufacturing company. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting Multiple Choice 71. In order to be useful to managers, managerial accounting reports should possess all of the following characteristics except a. provide objective measures of past operations and subjective estimates about future decisions b. be prepared in accordance with generally accepted accounting principles c. be provided at any time management needs information d. be prepared to report information for any unit of the business to support decision making ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:30 PM 72. What is the primary criterion for the preparation of managerial accounting reports? a. relevance of the reports b. manager needs c. timing of the reports d. cost of the reports ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM

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Chapter 18 - Introduction to Managerial Accounting 73. Which of the following is most associated with managerial accounting? a. must follow GAAP b. may rely on estimates and forecasts c. is prepared for users outside the organization d. always reports on the entire entity ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:35 PM 74. Which of the following is most associated with financial accounting? a. can have both objective and subjective information b. can be prepared periodically, or as needed c. prepared in accordance with GAAP d. can be prepared for the entity or segment ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:36 PM

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Chapter 18 - Introduction to Managerial Accounting 75. Which of the following statements is false? a. There is no overlap between financial and managerial accounting. b. Managerial accounting sometimes relies on past information. c. Managerial accounting does not need to conform to GAAP. d. Financial accounting must conform to GAAP. ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:36 PM 76. In most business organizations, the chief management accountant is called the a. chief accounting officer b. controller c. chairman of the board d. chief executive officer ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 77. All of the following employees hold line positions except a. vice president of production b. vice president of finance c. manager of equipment d. vice president of sales ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:12 PM 78. The controller's staff often consists of several management accountants. All of the following would most likely be on the controller's staff except a. general accountants b. budget analysts c. investments and shareholder relations managers d. cost accountants ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 79. Managerial accounting reports are a. prepared according to GAAP b. prepared according to management needs c. prepared periodically only d. related to the entire business entity only ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:43 PM 80. Who are the individuals charged with the responsibility for directing the day-to-day operations of a business? a. investors b. managers c. shareholders d. customers ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 81. Which of the following are basic phases of the management process? a. supervising and directing b. decision making and supervising c. organizing and directing d. planning and controlling ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 82. What term is used to describe the process of monitoring operating results and comparing actual results with the expected results? a. improving b. controlling c. directing d. planning ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 83. Accounting designed to meet the needs of decision makers inside the business is a. general accounting b. financial accounting c. managerial accounting d. external accounting ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:13 PM 84. What term is used to describe the process of developing the organization’s objectives and translating those into courses of action? a. supervising b. planning c. improving d. decision making ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 85. The primary goal of managerial accounting is to provide information to a. investors b. creditors c. management d. external auditors ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:13 PM 86. Which of the following is the principal reason for preparing managerial accounting reports? a. usefulness to management b. cost of preparation c. clarity d. GAAP ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 87. Which of the following is not a characteristic of useful managerial accounting reports? a. accurate b. adhere to GAAP c. historical and estimated data d. prepared as needed ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 7:53 PM 88. Managers use managerial information for all of the following except to a. evaluate the company’s stock performance b. analyze the performance of a company’s operations c. support long-term planning decisions d. determine the cost of manufacturing a product ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:34 AM

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Chapter 18 - Introduction to Managerial Accounting 89. Managerial accountants could prepare all of the following reports except a(n) a. performance report identifying amounts of scrap b. control report comparing direct material usage over time c. sales report targeting monthly sales and potential bonuses d. annual report for external regulators such as the SEC ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:34 AM 90. Compute conversion costs given the following data: direct materials, $347,500; direct labor, $196,300; factory overhead, $187,900; and selling expenses, $45,290. a. $543,800 b. $187,900 c. $731,700 d. $384,200 ANSWER: RATIONALE:

d Conversion Costs = Direct Labor Cost + Factory Overhead Cost = $196,300 + $187,900 = $384,200 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:16 PM

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Chapter 18 - Introduction to Managerial Accounting 91. Which of the following is not true in regard to direct materials for a bakery? a. Flour and sugar would probably be direct materials. b. Eggs would probably be a direct material. c. Oil to lubricate factory machines would not be a direct material. d. Paper cupcake liners, that become part of the product, must be accounted for as direct materials. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:16 PM 92. The cost of a manufactured product generally consists of which of the following costs? a. direct materials cost and factory overhead cost only b. direct labor cost and factory overhead cost only c. direct labor cost, direct materials cost, and factory overhead cost d. direct materials cost and direct labor cost only ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 93. Materials must have which two qualities in order to be classified as direct materials? a. They must be classified as both prime costs and conversion costs. b. They must be introduced into the process in both work in process inventories and finished goods inventories. c. They must be an integral part of the finished product, but can be an insignificant portion of the total product cost. d. They must be an integral part of the finished product and a significant portion of the total product cost. ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:05 PM 94. Which of the following is an example of direct materials cost for an automobile manufacturer? a. cost of oil lubricants for factory machinery b. cost of wages of assembly worker c. salary of production supervisor d. cost of interior upholstery ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 95. A plant manager’s salary is a(n) a. direct cost and an indirect cost b. direct cost c. indirect cost d. period cost ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:17 PM 96. If the cost of a direct material is a small portion of total production cost, it may be classified as part of a. direct labor cost b. selling and administrative costs c. miscellaneous costs d. factory overhead cost ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 97. The cost of wages paid to employees directly involved in the manufacturing process in converting materials into finished products is classified as a a. factory overhead cost b. direct labor cost c. miscellaneous cost d. direct materials cost ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:09 PM 98. Which of the following is an example of direct labor cost for a cell phone manufacturer? a. cost of oil lubricants for factory machinery b. cost of wages of assembly worker c. salary of plant supervisor d. cost of phone components ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 99. Costs other than direct materials cost and direct labor cost incurred in the manufacturing process are classified as a. factory overhead costs b. miscellaneous expenses c. product costs d. period costs ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:10 PM 100. Which of the following is an example of a factory overhead cost? a. repair and maintenance cost on an administrative building b. factory heating and lighting cost c. insurance premiums on salespersons' automobiles d. president's salary ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 101. Period costs include a. current assets on the balance sheet b. current liabilities on the balance sheet c. operating costs that are shown on the income statement when products are sold d. operating costs that are shown on the income statement in the period in which they are incurred ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:19 PM

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Chapter 18 - Introduction to Managerial Accounting 103. Which of the following costs are conversion costs? a. direct labor cost and factory overhead cost b. direct materials cost and direct labor cost c. factory overhead cost d. direct materials cost and factory overhead cost ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:19 PM 104. Goods that are partially completed by a manufacturer are a. merchandise inventory b. work in process inventory c. finished goods inventory d. materials inventory ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:19 PM

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Chapter 18 - Introduction to Managerial Accounting 105. What term refers to the cost of changing direct materials into a finished manufactured product? a. factory overhead cost b. period cost c. conversion cost d. direct labor cost ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:20 PM 106. Which of the following items would not be classified as part of factory overhead? a. direct labor used b. amortization of manufacturing patents c. production supervisors' salaries d. factory supplies used ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:14 PM

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Chapter 18 - Introduction to Managerial Accounting 107. Which of the following is part of factory overhead cost? a. sales commissions b. depreciation of factory equipment and machines c. depreciation of salesperson's vehicle d. direct materials used ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:20 PM 108. Which of the following manufacturing costs is an indirect cost of producing a product? a. oil lubricants used for factory machinery b. commissions for sales personnel c. hourly wages of an assembly worker d. memory chips for a microcomputer manufacturer ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 109. All of the following could be considered a direct material except a. steel b. fabric c. glue d. lumber ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:21 PM 110. Prime costs are a. direct materials and factory overhead b. direct materials and direct labor c. direct labor and factory overhead d. period costs and factory overhead ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 111. A product cost is a. expensed in the period in which it is manufactured b. shown with current liabilities on the balance sheet c. shown with operating expenses on the income statement d. expensed in the period the product is sold ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 5:46 PM 112. Conversion costs are a. direct materials and direct labor b. direct materials and factory overhead c. factory overhead and direct labor d. direct materials and indirect labor ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 113. Which of the following is not a prime cost? a. plant janitor’s wages b. direct labor wages c. machine operator wages d. assembly line wages ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting Use the information below for Darwin Company to answer the questions that follow. Sales Direct materials used Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials 114. Darwin Company's product costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000

$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200

ANSWER: RATIONALE:

d Product Costs = Direct Materials Cost + Direct Labor Cost + Factory Overhead Cost = $7,300 + $10,500 + $4,700 + $5,900 + $4,200 + $1,200 + $1,200 = $35,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Darwin LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:32 PM

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Chapter 18 - Introduction to Managerial Accounting 115. Darwin Company's period costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000 ANSWER: RATIONALE:

a Period Costs = Sales Salaries Expense + Office Salaries Expense = $15,600 + $8,900 = $24,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Darwin LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:32 PM 116. Product costs a. appear only on the balance sheet b. appear only on the income statement c. are expensed as costs are incurred for direct labor, direct material, and factory overhead d. appear on both the income statement and balance sheet ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 117. All of the following are product costs except a. direct materials b. sales and administrative expenses c. direct labor d. factory overhead ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:23 PM 118. Indirect labor and indirect materials are classified as a. factory overhead and product costs b. factory overhead and period costs c. operating costs and period costs d. operating costs and product costs ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 119. An example of a period cost is a. advertising expense b. indirect materials c. depreciation on factory equipment d. property taxes on plant facilities ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:23 PM 120. Direct labor and direct materials are a. product costs and expensed when the goods are sold b. product costs and expensed when incurred c. period costs and expensed when incurred d. period costs and expensed when the goods are sold ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 121. Indirect costs incurred in a manufacturing environment that cannot be traced directly to a product are treated as a. period costs and expensed when incurred b. product costs and expensed when the goods are sold c. product costs and expensed when incurred d. period costs and expensed when the goods are sold ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:25 PM 122. Rent expense on a factory building would be treated as a(n) a. period cost b. product cost c. indirect cost d. direct materials cost ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 123. Insurance expense incurred on a factory building would be treated as a a. direct cost b. period cost c. product cost d. selling cost ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting Use the information below for Jensen Company to answer the questions that follow. Direct materials used Direct labor incurred Factory overhead incurred Operating expenses 124. Jensen Company’s period costs are a. $345,000 b. $250,000 c. $400,000 d. $175,000

$345,000 250,000 400,000 175,000

ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Jensen LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:24 PM

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Chapter 18 - Introduction to Managerial Accounting 125. Jensen Company’s product costs are a. $995,000 b. $920,000 c. $825,000 d. $770,000 ANSWER: RATIONALE:

a Product Costs = Direct Materials Used + Direct Labor Incurred + Factory Overhead Incurred = $345,000 + $250,000 + $400,000 = $995,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Jensen LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:25 PM 126. Which of the following may not be a factory overhead cost? a. materials used directly in the manufacturing process of the product b. insurance on factory equipment c. salaries of production supervisors d. property tax on factory building ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 127. Factory overhead includes a. factory rent and direct labor b. direct materials and direct labor c. indirect materials and direct materials d. indirect labor and indirect materials ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:33 PM 128. All of the following are examples of indirect labor except a. maintenance personnel b. janitorial personnel c. machine operators d. plant managers ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 129. Which of the following accounts is not an example of a sustainable business activity? a. use of wind turbines to generate energy b. crop rotation c. expanded public transportation systems d. reduction of employee idle time ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-03 - 18-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/3/2017 8:38 PM DATE MODIFIED: 3/3/2017 11:33 PM 130. Replacing light fixtures with energy-efficient lighting is an example of which eco-efficiency measure? a. material use efficiency b. energy efficiency c. waste efficiency d. fuel efficiency ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 131. Which of the following accounts will be found on the income statement? a. Inventory b. Work in Process c. Finished Goods d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 8:45 PM

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Chapter 18 - Introduction to Managerial Accounting 132. Given the following data: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending Finished goods, beginning Finished goods, ending

$45,000 48,000 39,000 28,000 18,000 28,000 18,000

What is the cost of goods sold? a. $152,000 b. $142,000 c. $10,000 d. $128,000 ANSWER: RATIONALE:

a Cost of Goods Sold = Work in Process, Beginning + Cost of Materials Used + Direct Labor Costs + Factory Overhead – Work in Process, Ending + Finished Goods, Beginning – Finished Goods, Ending = $28,000 + $45,000 + $48,000 + $39,000 – $18,000 + $28,000 – $18,000 = $152,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:35 PM

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Chapter 18 - Introduction to Managerial Accounting 133. Given the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory

$30,000 65,000 40,000

What is the amount of raw materials used? a. $5,000 b. $55,000 c. $75,000 d. $30,000 ANSWER: RATIONALE:

b Amount of Raw Materials Used = Beginning Raw Materials Inventory + Materials Purchased – Ending Raw Materials Inventory = $30,000 + $65,000 – $40,000 = $55,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:36 PM

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Chapter 18 - Introduction to Managerial Accounting 134. A company manufactured 50,000 units of a product at a cost of $450,000. It sold 45,000 units at $15 each. The gross profit is a. $750,000 b. $240,000 c. $600,000 d. $270,000 ANSWER: RATIONALE:

d Cost of Manufacturing 45,000 units = ($450,000/50,000 units) × 45,000 = $405,000 Gross Profit = Sales – Cost of Manufacturing = ($15 × 45,000) – $405,000 = $675,000 – $405,000 = $270,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:37 PM

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Chapter 18 - Introduction to Managerial Accounting 135. The following information is taken from the financial records of Gunner Manufacturing: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending

$45,000 48,000 39,000 18,000 28,000

What is the cost of goods manufactured? a. $178,000 b. $132,000 c. $122,000 d. $142,000 ANSWER: RATIONALE:

c Cost of Goods Manufactured = Work in Process, Beginning + Cost of Materials Used + Direct Labor Costs + Factory Overhead – Work in Process, Ending = $18,000 + $45,000 + $48,000 + $39,000 – $28,000 = $122,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:37 PM

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Chapter 18 - Introduction to Managerial Accounting 136. Which of the following are reported on the income statement as part of cost of goods? a. administrative expenses b. period costs c. cost of goods manufactured d. operating expenses ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:38 PM 137. What is the purpose of the statement of cost of goods manufactured? a. to determine the ending materials inventory b. to determine the ending work in process inventory c. to determine the amount transferred to finished goods d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:39 PM

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Chapter 18 - Introduction to Managerial Accounting 138. Costs on the income statement for both a merchandiser and a manufacturer would be a. operating expenses b. direct materials c. direct labor incurred d. cost of goods manufactured ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:39 PM 139. On the income statement of a manufacturing company, what replaces purchases in the Cost of goods sold section of a retail company? a. finished goods b. cost of merchandise available c. cost of goods manufactured d. work in process ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:40 PM

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Chapter 18 - Introduction to Managerial Accounting 140. Cost of goods sold for a manufacturer equals cost of goods manufactured plus a. beginning work in process inventory less ending work in process inventory b. ending work in process inventory less beginning work in process inventory c. beginning finished goods inventory less ending finished goods inventory d. ending finished goods inventory less beginning finished goods inventory ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:40 PM

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Chapter 18 - Introduction to Managerial Accounting 141. Given the following data: Work in process, beginning Work in process, ending Direct labor costs Cost of goods manufactured Factory overhead

$14,000 20,000 4,000 8,000 8,000

Direct materials used is a. $2,000 b. $4,000 c. $8,000 d. $14,000 ANSWER: RATIONALE:

a Direct Materials Used = Cost of Goods Manufactured – Work in Process, Beginning + Work in Process, Ending – Direct Labor Costs – Factory Overhead = $8,000 – $14,000 + $20,000 – $4,000 – $8,000 = $2,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:41 PM

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Chapter 18 - Introduction to Managerial Accounting 142. Cost of goods manufactured is equal to a. total manufacturing costs plus ending materials inventory less beginning materials inventory b. cost of goods sold plus beginning work in process inventory less ending work in process inventory c. total manufacturing costs plus ending work in process inventory less beginning work in process inventory d. total manufacturing costs plus beginning work in process inventory less ending work in process inventory ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:41 PM 143. Finished goods inventory is reported on the a. income statement as a period cost b. balance sheet as a long-term asset c. balance sheet as a current asset d. income statement as revenue ANSWER: POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 144. Beginning work in process is equal to a. cost of goods manufactured plus ending work in process minus manufacturing costs incurred during the current period b. cost of goods manufactured minus ending work in process plus manufacturing costs incurred during the current period c. ending work in process plus manufacturing costs incurred during the current period d. manufacturing costs incurred during the current period minus ending work in process ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:42 PM 145. All of the following would be reported on the balance sheet as a current asset except a. factory overhead b. materials inventory c. finished goods inventory d. work in process inventory ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 10:10 PM

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Chapter 18 - Introduction to Managerial Accounting 146. Smith Company reports the following information: Cost of goods manufactured Direct materials used Direct labor incurred Work in process inventory, January 1

$68,250 27,000 25,000 11,000

Factory overhead is 75% of the cost of direct labor. Work in process inventory on December 31 is a. $16,250 b. $8,500 c. $18,750 d. $13,500 ANSWER: RATIONALE:

d Work in Process Inventory on December 31 = Beginning Work in Process Inventory + Direct Materials Used + Direct Labor Incurred + Factory Overhead – Cost of Goods Manufactured = $11,000 + $27,000 + $25,000 + ($25,000 × 75%) – $68,250 = $81,750 – $68,250 = $13,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:43 PM

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Chapter 18 - Introduction to Managerial Accounting 147. At the beginning of the current year, Grant Company’s work in process inventory account had a balance of $30,000. During the year, $68,000 of direct materials were used in production, and $66,000 of direct labor costs were incurred. Factory overhead for the year amounted to $90,000. Cost of goods manufactured is $230,000. The balance in Work in Process Inventory on December 31 is a. $24,000 b. $44,000 c. $66,000 d. $36,000 ANSWER: RATIONALE:

a Work in Process Inventory on December 31 = Beginning Work in Process Inventory + Direct Materials Used + Direct Labor Incurred + Factory Overhead – Cost of Goods Manufactured = $30,000 + $68,000 + $66,000 + $90,000 – $230,000 = $24,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:44 PM

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Chapter 18 - Introduction to Managerial Accounting 148. A company used $35,000 of direct materials, incurred $73,000 in direct labor cost, and had $114,000 in factory overhead costs during the period. If beginning and ending work in process inventories were $28,000 and $32,000, respectively, the cost of goods manufactured was a. $218,000 b. $226,000 c. $190,000 d. $222,000 ANSWER: RATIONALE:

a Cost of Goods Manufactured = Beginning Work in Process Inventories + Direct Materials + Direct Labor Cost + Factory Overhead Costs – Ending Work in Process Inventories = $28,000 + $35,000 + $73,000 + $114,000 – $32,000 = $218,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 10:19 PM

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Chapter 18 - Introduction to Managerial Accounting 149. Cost of goods manufactured during the year is $240,000, and work in process inventory on December 31 is $50,000. Work in process inventory during the year decreased by 60%. Total manufacturing costs incurred are a. $190,000 b. $165,000 c. $290,000 d. $315,000 ANSWER: RATIONALE:

b Total Manufacturing Costs = Cost of Goods Manufactured – Beginning Work in Process Inventory + Ending Work in Process Inventory = $240,000 – ($50,000/0.4) + $50,000 = $240,000 – $125,000 + $50,000 = $165,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:45 PM

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Chapter 18 - Introduction to Managerial Accounting 150. Work in process inventory on December 31 of the current year is $44,000. Work in process inventory increased by 60% during the year. Cost of goods manufactured amounts to $275,000. What are the total manufacturing costs incurred in the current year? a. $291,500 b. $302,000 c. $275,750 d. $233,750 ANSWER: RATIONALE:

a Total Manufacturing Costs = Cost of Goods Manufactured – Beginning Work in Process Inventory + Ending Work in Process Inventory = $275,000 – ($44,000/1.6) + $44,000 = $275,000 – $27,500 + $44,000 = $291,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:45 PM

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Chapter 18 - Introduction to Managerial Accounting 151. Work in process inventory on December 31 is $42,000. Work in process inventory decreased by 40% during the year. Total manufacturing costs incurred amount to $260,000. What is the cost of goods manufactured? a. $232,000 b. $302,000 c. $288,000 d. $190,000 ANSWER: RATIONALE:

c Cost of Goods Manufactured = Beginning Work in Process Inventory + Total Manufacturing Costs Incurred – Ending Work in Process Inventory = ($42,000/0.6) + $260,000 – $42,000 = $70,000 + $260,000 – $42,000 = $288,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:46 PM

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Chapter 18 - Introduction to Managerial Accounting 152. Work in process inventory increased by $20,000 during the current year. Cost of goods manufactured was $180,000. Total manufacturing costs incurred are a. $198,000 b. $160,000 c. $189,000 d. $200,000 ANSWER: RATIONALE:

d Total Manufacturing Costs = Cost of Goods Manufactured – Beginning Work in Process Inventory + Ending Work in Process Inventory = $180,000 – Beginning Work in Process Inventory + (Beginning Work in Process Inventory + $20,000) = $200,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:46 PM 153. Which of the following will not be found on the balance sheet of a manufacturing company? a. cost of goods sold b. materials c. work in process d. finished goods ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 10:46 PM

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Chapter 18 - Introduction to Managerial Accounting 154. A company sells goods for $150,000 that cost $54,000 to manufacture. Which of the following statements is true? a. The company will recognize sales on the balance sheet of $150,000. b. The company will recognize $96,000 gross profit on the balance sheet. c. The company will decrease finished goods by $54,000. d. The company will increase finished goods by $54,000. ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:47 PM 155. The cost of goods sold for Michaels Manufacturing in the current year was $233,000. The January 1 finished goods inventory balance was $31,600, and the December 31 finished goods inventory balance was $24,200. Cost of goods manufactured during the period was a. $233,000 b. $225,600 c. $288,800 d. $240,400 ANSWER: RATIONALE:

b Cost of Goods Manufactured = Cost of Goods Sold – Beginning Finished Goods Inventory + Ending Finished Goods Inventory = $233,000 – $31,600 + $24,200 = $225,600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:48 PM

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Chapter 18 - Introduction to Managerial Accounting 156. Which of the following would least likely be considered a managerial accounting report? a. a report to analyze potential efficiencies and savings for the purchase of new production equipment b. a schedule of total manufacturing costs incurred c. a statement of cost of goods manufactured d. a statement of stockholders’ equity ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:48 PM Matching Match the items below for a bakery to the type of cost (a–d). Answers may be used more than once. a. Direct materials b. Direct labor c. Factory overhead d. Nonmanufacturing cost DIFFICULTY:

Challenging Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/3/2017 11:49 PM 157. Salesperson commissions ANSWER: d POINTS: 1 158. Factory rent ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18 - Introduction to Managerial Accounting 159. Depreciation expense—factory ANSWER: c POINTS: 1 160. Frosting ANSWER: a POINTS: 1 161. Baker’s wages ANSWER: b POINTS: 1 162. Depreciation expense—office ANSWER: d POINTS: 1 163. Cupcake mix ANSWER: a POINTS: 1 164. Sprinkles for decoration (indirect material) ANSWER: c POINTS: 1 The following are some of the costs incurred by Cupcake Company. Identify them as either: a. Prime costs b. Conversion costs c. Both prime and conversion costs d. Neither prime nor conversion costs DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 166. Factory rent ANSWER: b POINTS: 1 167. Depreciation expense—factory ANSWER: b POINTS: 1 168. Frosting ANSWER: a POINTS: 1 169. Baker’s wages ANSWER: c POINTS: 1 170. Depreciation expense—office ANSWER: d POINTS: 1 171. Cupcake mix ANSWER: a POINTS: 1 172. Sprinkles for decoration (indirect material) ANSWER: b POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting Bartel Corporation produces bar stools for restaurants. For each of the following, indicate whether the cost would typically be considered a direct or indirect cost for the cost object given. a. Direct b. Indirect DIFFICULTY:

Easy Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 3:03 PM 173. The production labor wages for the bar stool assemblers ANSWER: a POINTS: 1 174. The factory supervisor’s salary for the bar stool factory ANSWER: b POINTS: 1 175. Lubricants used on the bar stool manufacturing equipment ANSWER: b POINTS: 1 176. Manufacturing costs for wood and steel used in the bar stools ANSWER: a POINTS: 1 177. Nails and screws used in the production of the bar stools ANSWER: a POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting For each of the following, indicate whether the cost would typically be considered a product or period cost for the cost object given. a. Product b. Period DIFFICULTY:

Easy Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 2:56 PM 178. Tires for the bicycles ANSWER: a POINTS: 1 179. Electricity costs to run the factory ANSWER: a POINTS: 1 180. Selling costs for the period ANSWER: b POINTS: 1 181. Delivery costs to take the bicycles to stores ANSWER: b POINTS: 1 182. Accountant salaries ANSWER: b POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting The phases of the management process are listed below. Match each phase to the appropriate description. a. Planning b. Directing c. Controlling d. Improving e. Decision making DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 2:24 PM DATE MODIFIED: 3/8/2017 8:36 AM 183. Used by managers for continuous improvement ANSWER: d POINTS: 1 184. Managers must continually choose among alternative actions ANSWER: e POINTS: 1 185. Used by management to develop the organization's objectives and goals ANSWER: a POINTS: 1 186. Monitoring the operating results of implemented plans and comparing actual results to expected results ANSWER: c POINTS: 1 187. Process by which managers run day-to-day operations ANSWER: b POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting The following are costs incurred by a lawn mower manufacturer. Identify them as either: a. Direct materials b. Direct labor c. Factory overhead DIFFICULTY:

Easy Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 2:30 PM DATE MODIFIED: 3/8/2017 8:37 AM 188. Wheels ANSWER: a POINTS: 1 189. Depreciation on worker's tools ANSWER: c POINTS: 1 190. Wages of assemblers ANSWER: b POINTS: 1 191. Grease for wheel axles ANSWER: c POINTS: 1 For each of the following costs, classify them as either: a. Direct costs b. Indirect costs c. Neither direct nor indirect costs DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting DATE MODIFIED: 3/4/2017 3:09 PM 192. Labor for machine maintenance ANSWER: b POINTS: 1 193. Factory equipment depreciation ANSWER: b POINTS: 1 194. Materials not traceable to specific products ANSWER: b POINTS: 1 195. Office equipment depreciation ANSWER: c POINTS: 1 196. Materials traceable to specific products ANSWER: a POINTS: 1 197. Insurance expired on administrative facilities ANSWER: c POINTS: 1 198. Product assembly labor incurred ANSWER: a POINTS: 1 199. Administrative office salaries ANSWER: c POINTS: 1 200. Salespersons' salaries ANSWER: c POINTS: 1 201. Utilities on factory building ANSWER: b POINTS: 1 202. Utilities on administrative facilities ANSWER: c POINTS: 1 Match each description to the appropriate term (a–d). Answers may be used more than once. Copyright Cengage Learning. Powered by Cognero.

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Chapter 18 - Introduction to Managerial Accounting a. Direct materials b. Selling and administrative expense c. Factory overhead d. Direct labor DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 2:43 PM DATE MODIFIED: 3/4/2017 3:09 PM 203. Rent expense on factory building ANSWER: c POINTS: 1 204. Sales supplies used ANSWER: b POINTS: 1 205. Factory supplies used ANSWER: c POINTS: 1 206. Indirect materials used ANSWER: c POINTS: 1 207. Wages of assembly line personnel ANSWER: d POINTS: 1 208. Cost of primary material used to make product ANSWER: a POINTS: 1 209. Depreciation on office equipment ANSWER: b POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting 210. Rent on office facilities ANSWER: b POINTS: 1 211. Insurance expired on factory equipment ANSWER: c POINTS: 1 212. Utilities incurred in the office ANSWER: b POINTS: 1 213. Advertising expense ANSWER: b POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting The following are some of the costs incurred by a cake factory. Identify them as either: a. Product costs b. Period costs DIFFICULTY:

Easy Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 3:04 PM DATE MODIFIED: 3/4/2017 3:10 PM 214. Frosting ANSWER: a POINTS: 1 215. Baker's wages ANSWER: a POINTS: 1 216. Advertising fees ANSWER: b POINTS: 1 217. Delivery expense ANSWER: b POINTS: 1 For each of the following, indicate whether the cost would typically be considered a product or period cost for the cost object given. a. Product b. Period DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 218. Direct materials used ANSWER: a POINTS: 1 219. Factory utilities ANSWER: a POINTS: 1 220. Salespersons' commissions ANSWER: b POINTS: 1 221. Salary of plant manager ANSWER: a POINTS: 1 222. Indirect materials used ANSWER: a POINTS: 1 223. Depreciation on store equipment ANSWER: b POINTS: 1 224. Indirect labor incurred ANSWER: a POINTS: 1 225. Advertising expense ANSWER: b POINTS: 1 226. Direct labor incurred ANSWER: a POINTS: 1 227. Factory machinery repairs and maintenance ANSWER: a POINTS: 1 228. Depreciation on factory machinery ANSWER: a POINTS: 1

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Chapter 18 - Introduction to Managerial Accounting 229. Plant insurance expired ANSWER: a POINTS: 1 Subjective Short Answer 230. Differentiate between financial and managerial accounting, addressing such issues as users, nature of information, guidelines for preparation, timeliness, and focus of reporting. Managerial Accounting Financial Accounting

ANSWER: Users

Management

External users and company management

Nature of information

Objective and subjective Objective

Guidelines for preparation

Prepared according to management needs

Timeliness

Prepared at fixed intervals Prepared at fixed intervals and on an as-needed basis

Focus of reporting

Company as a whole or as Company as a whole a segment

Prepared according to GAAP

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:34 PM

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Chapter 18 - Introduction to Managerial Accounting 231. What is decision making? Who is responsible for decision making in a managerial situation? ANSWER:

Inherent in each management process (planning, directing, controlling, and improving) is decision making. In managing a company, management must continually decide among alternative actions. For example, in directing operations, managers must continually decide on an operating structure, training procedures, and staffing of day-to-day operations. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/3/2017 11:07 PM DATE MODIFIED: 3/4/2017 5:34 PM 232. Differentiate between a line department and a staff department. ANSWER:

A line department is directly involved in providing goods or services to the customers of the company. Individuals in a line position are responsible for manufacturing and selling a company's products. Examples of a line position include senior vice president of equipment, plant manager, and managing director.

A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. Examples of staff positions include chief administrative office, vice president of human relations, chief financial officer, and controller. POINTS: 1 DIFFICULTY: Easy Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-01 - 18-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 1:33 PM DATE MODIFIED: 3/4/2017 5:35 PM

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Chapter 18 - Introduction to Managerial Accounting 233. Differentiate between period and product costs, including examples of each type of cost. ANSWER:

Period costs consist of selling and administrative expenses. Selling expenses are incurred in marketing the product and delivering the product to customers. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. Selling expenses include advertising expenses, sales salaries expenses, and commissions expenses. Administrative expenses include office salaries expenses, office supplies expense, and depreciation expense of the office building and equipment.

Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Direct materials are the materials that go into the production of the product. The direct materials for a bakery include flour, sugar, eggs, and shortening. Direct labor costs are the wages or salaries of the employees that are actually assembling the product. Factory overhead would include the salaries of production supervisors, depreciation, insurance, and taxes on the manufacturing building and equipment. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/4/2017 1:38 PM DATE MODIFIED: 3/4/2017 5:35 PM

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Chapter 18 - Introduction to Managerial Accounting 234. Differentiate between: (a) Direct materials versus indirect materials (b) Direct labor versus indirect labor (a)

ANSWER: (b)

Direct materials must become a physical part of the finished product and their costs must be separately and conveniently traceable through the manufacturing process to finished goods inventory. Examples include wood, leather, steel, etc. Indirect materials become part of the finished product, but their minor costs cannot conveniently be traced directly to particular finished products. They are included as part of factory overhead. Direct labor cost is the compensation of employees who physically convert materials into the company’s products and whose effort can be traced directly to finished goods inventory. Examples include machine operators and assemblers. Indirect labor is factory labor that is difficult to trace to specific products. Instead, the cost is included in factory overhead. Examples include forklift operators, janitors, and plant managers.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/17/2017 12:56 PM

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Chapter 18 - Introduction to Managerial Accounting 235. Putney Company reports the following information: Sales Cost of direct materials used in production Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials

$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200

Compute: (a) Product costs (b) Period costs Product Costs = $7,300 + $4,700 + $5,900 + $10,500 + $4,200 + $1,200 + $1,200 = $35,000 (b) Period Costs = $15,600 + $8,900 = $24,500 (a) ANSWER: POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:37 PM 236. The following information is available for Carter Corporation: (1) (2) (3) (4) (5) (6)

Materials inventory decreased $4,000. Materials inventory on December 31 was 50% of materials inventory on January 1. Beginning work in process inventory was $145,000. Ending finished goods inventory was $65,000. Purchases of direct materials were $154,700. Direct materials used were 2.5 times the cost of direct labor. Total manufacturing costs incurred were $246,400, 80% of cost of goods manufactured and $156,000 less (7) than cost of goods sold. Compute: (a) Finished goods inventory on January 1 (b) Work in process inventory on December 31 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18 - Introduction to Managerial Accounting (c) (d) (e) (f)

Direct labor incurred Factory overhead incurred Materials inventory on January 1 Direct materials used

ANSWER: (a) Cost of Goods Sold = $246,400 + $156,000 = $402,400 Cost of Goods Manufactured = $246,400/0.80 = $308,000 Finished Goods Inventory on January 1 = $402,400 + $65,000 – $308,000 = $159,400 (b) Work in Process Inventory on December 31 = $246,400 + $145,000 – $308,000 = $83,400 (c) Direct Labor Incurred = $158,700/2.5 = $63,480 (d) Factory Overhead Incurred = $246,400 – $158,700 – $63,480 = $24,220 (e) Materials Inventory on January 1 X = January 1 Materials Inventory $4,000 = 0.5X X = $8,000 (f)

Materials Inventory on December 31 = $8,000 – $4,000 = $4,000

(g) Direct Materials Used = $8,000 + $154,700 – $4,000 = $158,700 POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-02 - 18-02 ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:38 AM

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Chapter 18 - Introduction to Managerial Accounting 237. Zoe Corporation has the following information for the month of March. Determine the (a) cost of goods manufactured and (b) cost of goods sold. Cost of materials used in production Direct labor Factory overhead Work in process inventory, March 1 Work in process inventory, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31 ANSWER:

$69,000 27,000 34,000 15,000 19,500 25,000 23,000

(a) Beginning work in process inventory Direct materials Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured

$ 15,000 $69,000 27,000 34,000

(b) Finished goods inventory, March 1 Cost of goods manufactured Cost of finished goods available for sale Less finished goods inventory, March 31 Cost of goods sold

130,000 $145,000 19,500 $125,500

$ 25,000 125,500 $150,500 23,000 $127,500

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:38 PM

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Chapter 18 - Introduction to Managerial Accounting 238. Sienna Company has the following information for January: Cost of materials used in production Direct labor Factory overhead Work in process inventory, January 1 Work in process inventory, January 31

$20,000 15,000 24,000 2,900 3,500

Calculate the cost of goods manufactured. Beginning work in process inventory $ 2,900 Direct materials $20,000 Direct labor 15,000 Factory overhead 24,000 Total manufacturing costs incurred 59,000 Total manufacturing costs $61,900 Less ending work in process inventory 3,500 Cost of goods manufactured $58,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:39 PM ANSWER:

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Chapter 18 - Introduction to Managerial Accounting 239. Magnus Industries has the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory

$75,000 40,000 60,000

Calculate the cost of raw materials used. ANSWER: POINTS: DIFFICULTY:

Raw Materials Used = $75,000 + $40,000 – $60,000 = $55,000 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:40 PM 240. Watson Company has the following data: Work in process inventory, beginning Work in process inventory, ending Direct labor costs Cost of goods manufactured Factory overhead

$18,000 25,000 5,000 9,000 7,000

Calculate the amount of direct materials used. ANSWER:

Direct Materials Used = ($25,000 – $18,000 + $9,000) – ($7,000 + $5,000) = $4,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:40 PM

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Chapter 18 - Introduction to Managerial Accounting 241. Laramie Technologies has the following data: Work in process inventory, beginning Work in process inventory, ending Direct labor costs Cost of materials used Factory overhead

$45,000 32,000 56,000 50,000 28,000

Calculate the cost of goods manufactured. ANSWER:

Cost of Goods Manufactured = $50,000 + $56,000 + $28,000 + ($45,000 – $32,000) = $147,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:41 PM

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Chapter 18 - Introduction to Managerial Accounting 242. Keeton Company has the following data: Cost of materials used Direct labor costs Factory overhead Work in process inventory, beginning Work in process inventory, ending Finished goods inventory, beginning Finished goods inventory, ending

$60,000 58,000 33,000 29,000 18,000 32,000 18,000

Calculate the cost of goods sold. ANSWER:

Cost of Goods Sold = $60,000 + $58,000 + $33,000 + ($29,000 – $18,000) + ($32,000 – $18,000) = $176,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:42 PM 243. Zoe Corporation has the following information for the month of March: Purchases Materials inventory, March 1 Materials inventory, March 31 Direct labor Factory overhead Work in process inventory, March 1 Work in process inventory, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31 Sales Selling and administrative expenses

$ 92,000 6,000 8,000 25,000 37,000 22,000 23,500 21,000 30,000 257,000 79,000

Prepare (a) a schedule of cost of goods manufactured, (b) an income statement for the month ended March 31, and (c) the Inventory section of the balance sheet. ANSWER:

(a) Zoe Corporation Statement of Cost of Goods Manufactured For the Month Ended March 31 Beginning work in process inventory, March 1

$ 22,000 Page 109

Chapter 18 - Introduction to Managerial Accounting Direct materials: Beginning materials inventory Purchases Cost of materials available for use Less ending materials inventory Cost of materials used Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured

$ 6,000 92,000 $98,000 8,000 $90,000 25,000 37,000 152,000 $174,000 23,500 $150,500

(b) Zoe Corporation Income Statement For the Month Ended March 31 Sales Cost of goods sold: Beginning finished goods inventory Cost of goods manufactured Cost of finished goods available for sale Less ending finished goods inventory Cost of goods sold Gross profit Operating expenses: Selling and administrative expenses Net income (c) Inventories: Finished goods Work in process Materials Total inventories POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

$257,000 $ 21,000 150,500 $171,500 30,000 141,500 $115,500 79,000 $ 36,500

$30,000 23,500 8,000 $61,500

1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.18-04 - 18-04

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Chapter 18 - Introduction to Managerial Accounting ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:39 AM 244. The following data (in thousands of dollars) have been taken from the accounting records of Rayburn Corporation for the current year. Sales Selling expenses Factory overhead Direct labor Administrative expenses Purchases of direct materials Finished goods inventory, beginning Finished goods inventory, ending Materials inventory, beginning Materials inventory, ending Work in process inventory, beginning Work in process inventory, ending

$1,980 280 460 400 300 240 240 320 80 140 140 100

Required (a) What was the cost of the direct materials used in production during the year? (b) What was the cost of goods manufactured for the year? (c) What was the cost of goods sold for the year? (d) What was the net income for the year? Present all calculations in thousands of dollars. ANSWER:

(a) The cost of the direct materials used in production during the year is determined as follows: Materials inventory, beginning Purchases of direct materials Less materials inventory, ending Direct materials used in production

$ 80 240 140 $180

(b) The cost of goods manufactured (finished) during the year is determined as follows: Raw materials used in production Direct labor Factory overhead Total manufacturing costs Less work in process inventory, beginning Less work in process inventory, ending Cost of goods manufactured Copyright Cengage Learning. Powered by Cognero.

$ 180 400 460 $1,040 140 $1,180 100 $1,080 Page 111

Chapter 18 - Introduction to Managerial Accounting (c) The cost of goods sold for the year is determined as follows: Finished goods inventory, beginning Cost of goods manufactured Less finished goods inventory, ending Cost of goods sold

$ 240 1,080 320 $1,000

(d) Net income for the year is determined as follows: Sales $1,980 Cost of goods sold 1,000 Gross profit $ 980 Operating expenses: Administrative expenses $300 Selling expenses 280 580 Net income $ 400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 4:31 PM

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Chapter 18 - Introduction to Managerial Accounting 245. Allen Company used $71,000 of direct materials and incurred $37,000 of direct labor costs during the current year. Indirect labor amounted to $2,700, while indirect materials used totaled $1,600. Other operating costs pertaining to the factory included utilities of $3,100, maintenance of $4,500, supplies of $1,800, depreciation of $7,900, and property taxes of $2,600. There was no beginning or ending finished goods inventory, but work in process inventory began the year with a $5,500 balance and ended the year with a $7,500 balance. Prepare a statement of cost of goods manufactured. ANSWER: Allen Company Statement of Cost of Goods Manufactured For the Year Ended December 31 Beginning work in process inventory $ 5,500 Direct materials $71,000 Direct labor 37,000 Factory overhead: Indirect labor $2,700 Indirect materials 1,600 Utilities 3,100 Maintenance 4,500 Supplies 1,800 Depreciation 7,900 Property taxes 2,600 24,200 Total manufacturing costs incurred 132,200 Total manufacturing costs $137,700 Less ending work in process inventory 7,500 Cost of goods manufactured $130,200 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.18-04 - 18-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 5:43 PM 246. Davis Manufacturing Company had the following data:

Accounts receivable Materials inventory Work in process inventory Finished goods inventory

January 1 $27,000 22,500 70,200 3,000

December 31 $33,000 6,000 48,000 15,000

Collections on account were $625,000. Copyright Cengage Learning. Powered by Cognero.

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Chapter 18 - Introduction to Managerial Accounting Cost of goods sold was 68% of sales. Direct materials purchased amounted to $90,000. Factory overhead was 300% of the cost of direct labor. Compute: (a) Sales revenue (all sales were on account) (b) Cost of goods sold (c) Cost of goods manufactured (d) Direct materials used (e) Direct labor incurred (f) Factory overhead incurred ANSWER: (a) Sales Revenue = $33,000 + $625,000 – $27,000 = $631,000 (b) Cost of Goods Sold = $631,000 × 0.68 = $429,080 (c) Cost of Goods Manufactured = $15,000 + $429,080 – $3,000 = $441,080 (d) Direct Materials Used = $22,500 + $90,000 – $6,000 = $106,500 (e) Direct Labor Incurred = $441,080 + $48,000 – $70,200 = $418,880 Total Manufacturing Costs Added $418,880 – $106,500 = $312,380 $312,380 = Factory Overhead + Direct Labor Let X = Direct Labor 3X + X = $312,380 4X = $312,380 Direct Labor = $78,095 (f)

Factory Overhead Incurred = $78,095 × 3 = $234,285

POINTS: DIFFICULTY:

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Chapter 18 - Introduction to Managerial Accounting 247. Taylor Industries had a fire and some of its accounting records were destroyed. Available information is presented below for the year ended December 31. Materials inventory, December 31 Direct materials purchased Direct materials used Cost of goods manufactured

$ 15,000 28,000 22,900 135,000

Additional information: Factory overhead is 150% of direct labor cost. Finished goods inventory decreased by $18,000 during the year. Work in process inventory increased by $12,000 during the year. Calculate: (a) Materials inventory, January 1 (b) Direct labor cost (c) Factory overhead incurred (d) Cost of goods sold ANSWER:

(a)

Materials Inventory, January 1 = $15,000 + $22,900 – $28,000 = $9,900

(b) Direct Labor Cost = $135,000 + $12,000 = $147,000 Total Manufacturing Costs $147,000 – $22,900 = $124,100 Direct Labor and Factory Overhead Let X = Direct Labor Cost X + 1.5X = $124,100 2.5X = $124,100 Direct Labor = $49,640 (c) Factory Overhead Incurred = $49,640 × 1.5 = $74,460 (d) Cost of Goods Sold = $135,000 + $18,000 = $153,000 POINTS: DIFFICULTY:

Page 115

Chapter 19 - Job Order Costing True / False 1. Cost accounting systems measure, record, and report product costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:44 PM 2. A manufacturer may employ a job order cost system for some of its products and a process cost system for others. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 3. A job order cost accounting system provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 4. A process cost accounting system provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM

Page 2

Chapter 19 - Job Order Costing 5. A process cost accounting system provides product costs for each of the departments or processes within the factory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:45 PM 6. A process cost accounting system is best used by manufacturers of like units of product that are not distinguishable from each other during a continuous production process. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 7. The process cost system is appropriate where few products are manufactured and each product is made to customers' specifications. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM

Page 4

Chapter 19 - Job Order Costing 9. Perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods in job order costing systems. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 10. When goods are sold, their costs are transferred from Work in Process to Finished Goods. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 11. The materials requisition serves as the source document for debiting the accounts in the materials ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 12. Materials are transferred from the storeroom to the factory in response to materials requisitions. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 13. The document that serves as the basis for recording direct labor on a job cost sheet is the clock card. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:46 PM 14. The document that serves as the basis for recording direct labor on a job cost sheet is the time ticket. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 15. Depreciation expense on factory equipment is part of factory overhead cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 16. Factory overhead is applied to production using a predetermined overhead rate. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 17. If factory overhead applied exceeds the actual costs, the factory overhead account will have a credit balance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 18. If factory overhead applied exceeds the actual costs, overhead is said to be underapplied. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM

Page 9

Chapter 19 - Job Order Costing 19. If the underapplied factory overhead amount is immaterial, it is transferred to Cost of Goods Sold at the end of the fiscal year. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 20. Each account in the work in process subsidiary ledger in a job order costing system is called a job cost sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 19 - Job Order Costing 21. In the job order costing system, the finished goods account is the controlling account for the factory overhead ledger. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:48 PM 22. The inventory accounts generally maintained by a manufacturing firm are only finished goods and materials. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 23. Generally accepted accounting principles require companies to use only one factory overhead rate for product costing. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 24. Activity-based costing is a method of accumulating and allocating costs by department. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 25. Interim financial statements for a manufacturing business would report overapplied factory overhead as a deferred item on the balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 26. The debit to Factory Overhead for the cost of indirect materials is obtained from the summary of the materials requisitions. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 27. In a factory with several processing departments, a single factory overhead rate may not provide accurate product costs and effective cost control. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 28. Nonmanufacturing costs are generally classified into two categories: selling and administrative. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 29. The current year's advertising costs are normally considered period costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 30. Direct labor cost is an example of a period cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:28 PM

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Chapter 19 - Job Order Costing 31. A manufacturing business reports just two types of inventory on its balance sheet: work in process inventory and finished goods inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 32. On the balance sheet for a manufacturing business, the cost of direct materials, direct labor, and factory overhead, which have entered into the manufacturing process but are associated with products that have not been finished, are reported as direct materials inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:29 PM

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Chapter 19 - Job Order Costing 33. As product costs are incurred in the manufacturing process, they are accounted for as assets and reported on the balance sheet as inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:31 PM 34. A receiving report is prepared when purchased materials are first received by the manufacturing department. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 35. Period costs are costs that are incurred for the production requirements of a certain period. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 36. Job order cost systems can be used to compare unit costs of similar jobs to determine if costs are staying within expected ranges. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:40 PM

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Chapter 19 - Job Order Costing 37. Job cost sheets can provide information to managers on unit cost trends, the cost impact of continuous improvement in the manufacturing process, the cost impact of materials changes, and the cost impact of direct materials price or direct labor rate changes over time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:40 PM 38. Job order cost accounting systems may be used to evaluate a company's efficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM

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Chapter 19 - Job Order Costing 39. Information about costs developed through a job order cost system cannot be used to evaluate an organization’s cost performance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:50 PM 40. Job order cost accounting systems may be used for planning and controlling a service business. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 41. The job order costing system is used by service firms to determine revenues, expenses, and ultimately profit. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 42. The job order costing system is not used by service organizations. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM

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Chapter 19 - Job Order Costing 43. A law firm would use a job order cost system to accumulate all of the costs associated with a particular client engagement, such as lawyer time, copying charges, filing fees, and overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:41 PM 44. Job order cost accounting systems can be used only for companies that manufacture a product. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 45. The direct labor and overhead costs of providing services to clients are accumulated in a work in process account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:51 PM 46. In a job order cost accounting system for a service business, materials costs are normally included as part of overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 47. A service organization will not use the job order costing method because it has no direct materials. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:43 PM 48. Using the job order cost system, service organizations are able to bill customers on a weekly or monthly basis, even when the job has not been completed. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 7:43 PM

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Chapter 19 - Job Order Costing Multiple Choice 49. Which of the following are the two main types of cost accounting systems for manufacturing operations? a. process cost and general accounting systems b. job order cost and process cost systems c. job order and general accounting systems d. process cost and replacement cost systems ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 50. Which of the following would most likely use a job order costing system? a. paper mill b. swimming pool installer c. company that manufactures chlorine for swimming pools d. oil refinery ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 51. Which of the following would be most likely to use process costing? a. custom furniture manufacturer b. auto body repair shop c. law firm d. lawn fertilizer manufacturer ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 10:09 PM 52. Which of the following systems provides for a separate record of the cost of each particular quantity of product that passes through the factory? a. job order cost system b. general cost system c. replacement cost system d. process cost system ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 53. For which of the following businesses would the job order cost system be appropriate? a. canned soup processor b. oil refinery c. lumber mill d. hospital ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 10:14 PM 54. For which of the following businesses would the process cost system be appropriate? a. custom cabinet maker b. landscaper c. paper mill d. catering firm ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 10:15 PM

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Chapter 19 - Job Order Costing 55. Which of the following is not a characteristic of a job order costing system? a. It accumulates cost for each department within the factory. b. It provides a separate record for the cost of each quantity of product that passes through the factory. c. It is best suited for industries that manufacture custom goods. d. It uses only one work in process account. ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 10:16 PM 56. Which of the following products would be manufactured using a job order costing system? a. cell phone b. highlighter pen c. graduation invitation d. recliner ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:28 PM

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Chapter 19 - Job Order Costing 57. Job order costing and process costing are a. pricing systems b. cost accounting systems c. cost flow systems d. inventory tracking systems ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 10:18 PM 58. Which of the following is not a reason a service firm would use a job order costing system? a. to help control costs b. to determine client billing c. to determine department costs within the firm d. to determine profit ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:29 PM

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Chapter 19 - Job Order Costing 59. Which of the following costs are not included in finished goods inventory? a. direct labor b. factory overhead c. chief financial officer's salary d. direct materials ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:29 PM 60. Which of the following is the correct flow of manufacturing costs? a. raw materials, work in process, finished goods, cost of goods sold b. raw materials, finished goods, cost of goods sold, work in process c. work in process, finished goods, raw materials, cost of goods sold d. cost of goods sold, raw materials, work in process, finished goods ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 61. Which of the following would record the labor costs for an individual job? a. clock cards b. in-and-out cards c. time tickets d. payroll register ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:30 PM 62. Thomlin Company forecasts that total overhead for the current year will be $15,500,000 with 250,000 total machine hours. Year to date, the actual overhead is $16,000,000, and the actual machine hours are 330,000 hours. The predetermined overhead rate based on machine hours is a. $48 per machine hour b. $62 per machine hour c. $45 per machine hour d. $50 per machine hour ANSWER: RATIONALE:

b Predetermined Overhead Rate = Estimated Total Overhead Costs/Estimated Activity Base = $15,500,000/250,000 machine hours = $62 per machine hour POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:31 PM

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Chapter 19 - Job Order Costing 63. Thomlin Company forecasts that total overhead for the current year will be $15,000,000 with 300,000 total machine hours. Year to date, the actual overhead is $16,000,000, and the actual machine hours are 330,000 hours. If Thomlin Company uses a predetermined overhead rate based on machine hours for applying overhead, as of this point in time (year to date), the overhead is a. $1,000,000 overapplied b. $1,000,000 underapplied c. $500,000 overapplied d. $500,000 underapplied ANSWER: RATIONALE:

c Predetermined Overhead Rate = Estimated Total Overhead Costs/Estimated Activity Base = $15,000,000/300,000 machine hours = $50 per machine hour Applied Overhead = Predetermined Overhead Rate × Actual Machine Hours = $50 × 330,000 machine hours = $16,500,000 Overapplied Overhead = Applied Overhead – Actual Overhead = $16,500,000 – $16,000,000 = $500,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:31 PM

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Chapter 19 - Job Order Costing 64. At the end of the year, overhead applied was $42,000,000. Actual overhead was $40,300,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to a. increase by $1,700,000 b. decrease by $1,700,000 c. increase by $3,400,000 d. decrease by $3,400,000 ANSWER: RATIONALE:

a Net income will increase since overheads have been overapplied. Increase in Net Income = Applied Overhead – Actual Overhead = $42,000,000 – $40,300,000 = $1,700,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:32 PM 65. Which of the following is a period cost? a. depreciation on factory lunchroom furniture b. salary of telephone receptionist in the sales office c. salary of a security guard for the factory parking lot d. computer chips used by a computer manufacturer ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:32 PM

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Chapter 19 - Job Order Costing 66. Which of the following is a product cost? a. salary of a sales manager b. advertising for a particular product c. drill bits for a drill press used in the plant assembly area d. salary of the company receptionist ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:33 PM 67. The document authorizing the issuance of materials from the storeroom is a a. materials requisition b. purchase requisition c. receiving report d. purchase order ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 68. The source document for the data for debiting Work in Process for direct materials is a a. purchase order b. purchase requisition c. materials requisition d. receiving report ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:34 PM 69. In a job order cost accounting system, the entry to record the flow of direct materials into production is to a. debit Work in Process, credit Materials b. debit Materials, credit Work in Process c. debit Factory Overhead, credit Materials d. debit Work in Process, credit Supplies ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 11:10 PM

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Chapter 19 - Job Order Costing 70. A summary of the materials requisitions completed during a period serves as the basis for transferring the cost of the materials from the controlling account in the general ledger to the controlling accounts for a. Work in Process and Cost of Goods Sold b. Work in Process and Factory Overhead c. Finished Goods and Cost of Goods Sold d. Work in Process and Finished Goods ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 11:12 PM 71. In a job order cost accounting system, when goods that have been ordered are received, the receiving department personnel count the goods, inspect the goods, and complete a a. purchase order b. sales invoice c. receiving report d. purchase requisition ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 72. The amount of time spent by an employee on an individual job is recorded on a. pay stubs b. in-and-out cards c. time tickets d. employees' earnings records ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:35 PM 73. The amount of time spent by an employee in the factory is usually recorded on a. time tickets b. job order cost sheets c. employees' earnings records d. the statement of owner's equity ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:38 PM

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Chapter 19 - Job Order Costing 74. The basis for recording direct and indirect labor costs incurred is a summary of the period's a. job order cost sheets b. time tickets c. employees' earnings records d. clock cards ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 75. The entry to record the flow of direct labor costs into production in a job order cost accounting system is to a. debit Factory Overhead, credit Work in Process b. debit Finished Goods, credit Wages Payable c. debit Work in Process, credit Wages Payable d. debit Factory Overhead, credit Wages Payable ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 76. At the end of July, the first month of the current fiscal year, the factory overhead account had a debit balance. Which of the following describes the nature of this balance and how it would be reported on the interim balance sheet? a. overapplied, deferred credit b. underapplied, deferred debit c. underapplied, deferred credit d. overapplied, deferred debit ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 3:33 PM 77. At the end of the fiscal year, the balance in Factory Overhead is small. The balance would be a. transferred to Work in Process b. transferred to Cost of Goods Sold c. transferred to Finished Goods d. allocated between Work in Process and Finished Goods ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 78. The details concerning the costs incurred on each job order are accumulated in a work in process account and supported by a a. stock ledger b. materials ledger c. cost ledger d. creditors ledger ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 11:17 PM 79. Each document in the cost ledger is called a a. finished goods sheet b. stock record c. materials requisition d. job cost sheet ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:44 PM

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Chapter 19 - Job Order Costing 80. Selected accounts with amounts omitted are as follows: Work in Process Aug. 1 Balance 275,000 Aug. 31 Goods finished 31 Direct materials X 31 Direct labor 450,000 31 Factory overhead X

Aug. 1–31 Costs incurred

Factory Overhead 145,000 Aug. 1 Balance 31 Applied (30% of direct labor cost)

1,030,000

15,000

If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for direct materials in August? a. $390,000 b. $170,000 c. $525,000 d. $580,000 ANSWER: RATIONALE:

a Amount Debited to Work in Process for Direct Materials in August = Finished Goods + Balance of Work in Process on August 31 – Balance of Work in Process on August 1 – Direct Labor – Applied Factory Overhead = $1,030,000 + $220,000 – $275,000 – $450,000 – ($450,000 × 30%) = $390,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:46 AM

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Chapter 19 - Job Order Costing 81. Selected accounts with amounts omitted are as follows: Work in Process Aug. 1 Balance 275,000 Aug. 31 Goods finished 31 Direct materials X 31 Direct labor 450,000 31 Factory overhead X

Aug. 1–31 Costs incurred

Factory Overhead 145,000 Aug. 1 Balance 31 Applied

1,030,000

15,000 X

If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for factory overhead in August, assuming a factory overhead rate of 30% of direct labor costs? a. $10,000 b. $70,000 c. $120,000 d. $135,000 ANSWER: RATIONALE:

d Amount Debited to Work in Process for Factory Overhead in August = Direct Labor Costs × Factory Overhead Rate = $450,000 × 30%) = $135,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 3/5/2017 2:19 PM DATE MODIFIED: 3/8/2017 8:46 AM

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Chapter 19 - Job Order Costing 82. Selected accounts with some amounts omitted are as follows:

Oct. 1 31 31 31

Balance Direct materials Direct labor Factory overhead

Oct. 1 Balance 31 Goods finished

Work in Process 20,000 Oct. 31 96,700 201,000 X

Goods finished

Finished Goods 52,000 360,000

If the balance of Work in Process on October 31 is $21,000, what was the amount of factory overhead applied in October? a. $63,300 b. $21,300 c. $42,300 d. $11,300 ANSWER: RATIONALE:

a Amount of Factory Overhead Applied in October = Finished Goods + Balance of Work in Process on October 31 – Balance of Work in Process on October 1 – Direct Materials – Direct Labor = $360,000 + $21,000 – $20,000 – $96,700 – $201,000 = $63,300 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:46 PM

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Chapter 19 - Job Order Costing 83. Selected accounts with a credit amount omitted are as follows:

Apr. 1 30 30 30

Balance Direct materials Direct labor Factory overhead

Apr. 1 Balance 30 Goods finished

Work in Process 7,000 Apr. 30 78,400 195,000 136,500

Goods finished

Finished Goods 42,000 387,000

What was the balance of Work in Process as of April 30? a. $8,100 b. $35,000 c. $29,900 d. $22,900 ANSWER: RATIONALE:

c Balance of Work in Process as of April 30 = Finished Goods – Balance of Work in Process on April 1 – Direct Materials – Direct Labor – Factory Overhead = $387,000 – $7,000 – $78,400 – $195,000 – $136,500 = $29,900 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:46 PM

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Chapter 19 - Job Order Costing 84. If the amount of factory overhead cost incurred exceeds the amount applied, the factory overhead account will have a a. debit balance and be underapplied b. credit balance and be underapplied c. credit balance and be overapplied d. debit balance and be overapplied ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 3:05 PM 85. The recording of the factory labor incurred for general factory use would include a debit to a. Factory Overhead b. Wages Payable c. Wages Expense d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 86. The recording of the application of factory overhead costs to jobs would include a credit to a. Factory Overhead b. Wages Payable c. Work in Process d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 3:06 PM 87. Recording jobs completed would include a debit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:50 PM

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Chapter 19 - Job Order Costing 88. Recording jobs completed would include a credit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:48 PM 89. Recording jobs shipped and customers billed would include a debit to a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:48 PM

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Chapter 19 - Job Order Costing 90. Recording jobs shipped and customers billed would include a credit to a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:49 PM 91. The finished goods account is the controlling account for the a. cost ledger b. materials ledger c. work in process ledger d. stock ledger ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 92. The controlling account for the cost ledger is a. Finished Goods b. Materials c. Work in Process d. Cost of Goods Sold ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:51 PM 93. Reynolds Manufacturers Inc. has estimated total factory overhead costs of $95,000 and expected direct labor hours of 9,500 for the current fiscal year. If Job 117 incurs 2,300 direct labor hours, Work in Process will be debited and Factory Overhead will be credited for a. $21,850 b. $2,300 c. $95,000 d. $23,000 ANSWER: RATIONALE:

d Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $95,000/9,500 labor hours = $10 per labor hour Amount Credited to Factory Overhead = Predetermined Factory Overhead Rate × Direct Labor Hours = $10 × 2,300 labor hours = $23,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:52 PM

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Chapter 19 - Job Order Costing 94. A widely used activity base for developing factory overhead rates in highly automated settings is a. direct labor hours b. direct labor dollars c. direct materials d. machine hours ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:52 PM 95. When Job 117 was completed, direct materials totaled $4,400; direct labor, $5,600; and factory overhead, $2,400. A total of 1,000 units were produced at a per-unit cost of a. $12,400 b. $1,240 c. $124 d. $12.40 ANSWER: RATIONALE:

d Total Cost = Direct Materials + Direct Labor + Factory Overhead = $4,400 + $5,600 + $2,400 = $12,400 Per Unit Cost = $12,400/1,000 units = $12.40 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:53 PM

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Chapter 19 - Job Order Costing 96. The entries to record the cost and sale of a finished good on account is a. debit Cost of Goods Sold, credit Finished Goods b. debit Cost of Goods Sold, credit Finished Goods, debit Accounts Receivable, credit Sales c. debit Sales Expense, credit Finished Goods, credit Cash, credit Accounts Receivable d. debit Work in Process, credit Finished Goods, debit Accounts Receivable, credit Sales ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:54 PM 97. All of the following are examples of activity bases except a. salaries of supervisors b. quality inspections of products c. number of machine setups d. raw materials storage ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 98. Materials purchased on account during the month totaled $190,000. Materials requisitioned and placed in production totaled $165,000. The journal entry to record the material purchase on account is a. Materials 165,000 Accounts Payable 165,000 b. Materials 190,000 Accounts Payable 190,000 c. Materials 190,000 Cash 190,000 d. Accounts Payable 190,000 Materials 190,000 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:55 PM

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Chapter 19 - Job Order Costing 99. Materials purchased on account during the month amounted to $190,000. Materials requisitioned and placed in production totaled $156,000. The entry to record the transaction for materials requisitioned by the production department is a. Materials 156,000 Work in Process 156,000 b. Work in Process 190,000 Materials 190,000 c. Work in Process 156,000 Materials 156,000 d. Work in Process 156,000 Cash 156,000 ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:56 PM

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Chapter 19 - Job Order Costing 100. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. In addition, factory overhead charged to production was $32,000. The entry to record the direct labor costs is a. Work in Process 150,000 Wages Payable 150,000 b. Work in Process 175,000 Wages Payable 175,000 c. Wages Payable 175,000 Work in Process 175,000 d. Wages Payable 150,000 Work in Process 150,000 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:57 PM

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Chapter 19 - Job Order Costing 101. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $32,000. The entry to record the actual factory overhead costs incurred is a. Accounts Payable 25,000 Factory Overhead 25,000 b. Factory Overhead 32,000 Accounts Payable 32,000 c. Work in Process 25,000 Wages Payable 25,000 d. Factory Overhead 25,000 Wages Payable 25,000 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:58 PM

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Chapter 19 - Job Order Costing 102. During the period, labor costs incurred on account amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $23,000. The entry to record the factory overhead applied to production is a. Work in Process 25,000 Factory Overhead 25,000 b. Factory Overhead 23,000 Work in Process 23,000 c. Work in Process 23,000 Factory Overhead 23,000 d. Factory Overhead 25,000 Accounts Payable 25,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 103. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had total production costs of $375,000. The entry to record the transfer of costs from work in process to finished goods is a. Finished Goods 375,000 Work in Process 375,000 b. Finished Goods 540,000 Work in Process 540,000 c. Work in Process 540,000 Finished Goods 540,000 d. Work in Process 375,000 Finished Goods 375,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 104. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had production costs of $375,000. The entry to record the transfer of costs from finished goods to cost of goods sold is a. Finished Goods 540,000 Cost of Goods Sold 540,000 b. Finished Goods 375,000 Cost of Goods Sold 375,000 c. Cost of Goods Sold 375,000 Finished Goods 375,000 d. Cost of Goods Sold 540,000 Finished Goods 540,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:00 PM 105. Costs that are incurred in generating revenues during the period, but are not involved in the manufacturing process, are referred to as a. period costs b. conversion costs c. factory overhead costs d. product costs ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:00 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19 - Job Order Costing 106. Costs that are treated as assets until the product is sold are a. product costs b. period costs c. conversion costs d. selling expenses ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:01 PM 107. The period costs of a textbook printer would include a. wages of a press operator b. factory insurance costs c. CEO salary expense d. paper costs ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:02 PM

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Chapter 19 - Job Order Costing 108. Which types of inventories does a manufacturing business report on the balance sheet? a. finished goods inventory and work in process inventory only b. direct materials inventory and work in process inventory only c. direct materials inventory, work in process inventory, and finished goods inventory d. direct materials inventory and finished goods inventory only ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 3:54 PM 109. For a manufacturing business, products that are in the process of being manufactured are referred to as a. supplies inventory b. work in process inventory c. finished goods inventory d. direct materials inventory ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 110. The journal entry to record the purchase of $45,000 of raw materials is a. Materials 45,000 Accounts Receivable 45,000 b. Materials 45,000 Accounts Payable 45,000 c. Inventory 45,000 Accounts Receivable 45,000 d. Inventory 45,000 Cash 45,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 111. The journal entry to record the transfer of 1,600 units of Part No. 1177, with a value of $2.50 each, to work in process is a. Materials 4,000 Work in Process 4,000 b. Work in Process 4,000 Factory Overhead 4,000 c. Work in Process 4,000 Materials 4,000 d. Work in Process 4,000 Cash 4,000 ANSWER: RATIONALE:

c Number of Units × Unit Price = 1,600 × $2.50 = $4,000 The journal entry to record the transfer of 1,600 units of Part No. 1177, with a value of $2.50 each, to work in process is to debit Work in Process and to credit Materials for $4,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:04 PM

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Chapter 19 - Job Order Costing 112. Which of the following represents the factory overhead applied to a product? a. predetermined factory overhead rate times estimated activity base b. actual factory overhead rate times estimated activity base c. predetermined factory overhead rate times actual activity base d. actual factory overhead rate times actual activity base ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 113. Which of the following is the formula to calculate the predetermined factory overhead rate? a. estimated total factory overhead costs divided by estimated activity base b. actual total factory overhead costs divided by estimated activity base c. estimated total factory overhead costs divided by actual activity base d. actual total factory overhead costs divided by actual activity base ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 114. Aspen Technologies has the following budget data: Estimated direct labor hours Estimated direct labor dollars Estimated factory overhead costs

15,000 $90,000 $198,000

If factory overhead is to be applied based on direct labor hours, the predetermined overhead rate is a. $7.50 b. $13.20 c. $2.20 d. $16.50 ANSWER: RATIONALE:

b Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $198,000/15,000 labor hours = $13.20 per labor hour POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:06 PM

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Chapter 19 - Job Order Costing 115. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual factory overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the amount of overapplied or underapplied manufacturing overhead at the end of the year? a. $6,000 overapplied b. $6,000 underapplied c. $54,800 overapplied d. $54,800 underapplied ANSWER: RATIONALE:

c Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $360,000/30,000 direct labor hours = $12 per direct labor hour Applied Factory Overhead Costs = Predetermined Overhead Rate × Actual Direct Labor Hours = $12 × 36,000 direct labor hours = $432,000 Amount of Overapplied Overhead = Applied Factory Overhead Costs – Actual Factory Overhead Costs = $432,000 – $377,200 = $54,800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 4:40 PM

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Chapter 19 - Job Order Costing Use the budget data shown below for Sharp Company to answer the questions that follow: Estimated direct labor hours 12,000 Estimated direct labor dollars $90,000 Estimated factory overhead costs $179,000 Actual direct labor hours 11,500 Actual direct labor dollars $92,000 Actual factory overhead costs $180,000 116. If factory overhead is to be applied based on direct labor dollars, the predetermined overhead rate is a. 199% b. 196% c. $14.92 d. $15.65 ANSWER: RATIONALE:

a Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $179,000/$90,000 direct labor dollars = 199% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Sharp Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:11 PM

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Chapter 19 - Job Order Costing 117. If factory overhead is applied based on direct labor hours, the amount of overhead to be applied is a. $180,000 b. $181,000 c. $172,500 d. $184,000 ANSWER: RATIONALE:

c Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $180,000/12,000 direct labor hours = $15 per direct labor hour Applied Factory Overhead Costs = Predetermined Overhead Rate × Actual Direct Labor Hours = $15 × 11,500 direct labor hours = $172,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:12 PM

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Chapter 19 - Job Order Costing 118. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual manufacturing overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the predetermined overhead rate per direct labor hour? a. $12.00 b. $10.00 c. $12.57 d. $10.48 ANSWER: RATIONALE:

a Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $360,000/30,000 direct labor hours = $12.00 per direct labor hour POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 4:44 PM

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Chapter 19 - Job Order Costing 119. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual manufacturing overhead costs incurred were $377,200, and actual direct labor hours were 36,000. The entry to apply the factory overhead costs for the year would include a a. debit to Factory Overhead for $360,000 b. credit to Factory Overhead for $432,000 c. debit to Factory Overhead for $377,200 d. credit to Factory Overhead for $360,000 ANSWER: RATIONALE:

b Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $360,000/30,000 direct labor hours = $12 per direct labor hour Applied Factory Overhead Costs = Predetermined Overhead Rate × Actual Direct Labor Hours = $12 × 36,000 direct labor hours = $432,000 The journal entry to apply the factory overhead costs for the year would include a credit to Factory Overhead for $432,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 4:47 PM

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Chapter 19 - Job Order Costing Use the information below for Adams Company to answer the questions that follow. Adams Company is a manufacturing company that has worked on several production jobs during the first quarter of the year. Below is a list of all the jobs for the quarter: Job. No. 356 357 358 359 360

Balance $ 450 1,235 378 689 456

Jobs 356, 357, 358, and 359 were completed. Jobs 356 and 357 were sold at a profit of $500 on each job. 120. What is the ending balance of Work in Process for Adams Company at the end of the first quarter? a. $0 b. $456 c. $3,208 d. $2,752 ANSWER: RATIONALE:

b Only Job No. 360 is still incomplete and hence will be considered Work in Process. Therefore, the ending balance of Work in Process for Adams Company at the end of the first quarter is $456. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Adams Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:13 PM

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Chapter 19 - Job Order Costing 121. What is the ending balance of Cost of Goods Sold for Adams Company at the end of the first quarter? a. $456 b. $2,685 c. $1,685 d. $685 ANSWER: RATIONALE:

c Jobs 356 and 357 were sold during the quarter. Ending Balance of Cost of Goods Sold for Adams Company at End of First Quarter = Cost of Job 356 + Cost of Job 357 = $450 + $1,235 = $1,685 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Adams Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:15 PM

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Chapter 19 - Job Order Costing 122. What is the ending balance of Finished Goods for Adams Company at the end of the first quarter? a. $456 b. $1,067 c. $1,685 d. $2,752 ANSWER: RATIONALE:

b Jobs 358 and 359 were completed during the quarter but not sold. Ending Balance of Finished Goods for Adams Company at End of First Quarter = Ending Balance of Job 358 + Ending Balance of Job 359 = $378 + $689 = $1,067 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Adams Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:15 PM

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Chapter 19 - Job Order Costing 123. What is the balance of Sales for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 ANSWER: RATIONALE:

b Jobs 356 and 357 were sold during the quarter. Ending Balance of Cost of Goods Sold for Adams Company at End of First Quarter = Cost of Job 356 + Cost of Job 357 = $450 + $1,235 = $1,685 Jobs 356 and 357 were sold at a profit of $500 on each job. Balance of Sales for Adams Company at the End of First Quarter = Ending Balance of Cost of Goods Sold for Adams Company at the End of First Quarter + Profit on Job 356 + Profit on Job 357 = $1,685 + $500 + $500 = $2,685 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Adams Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:16 PM

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Chapter 19 - Job Order Costing 124. What is the gross profit for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 ANSWER: RATIONALE:

c Jobs 356 and 357 were sold at a profit of $500 on each job. Gross Profit for Adams Company at the End of First Quarter = Profit on Job 356 + Profit on Job 357 = $500 + $500 = $1,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Adams Company LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:17 PM 125. Bar code scanners are now being used to track incoming materials and to electronically transmit these data. Scanners have replaced which of the following? a. receiving report b. materials requisition c. materials ledger d. job cost sheet ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 126. A separate account for each material is found in a a. general ledger b. materials ledger c. receiving report d. job cost sheet ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/4/2017 6:22 PM 127. The materials requisition is used to a. release materials from the storeroom to the factory b. release finished goods to the shipping department c. record the acquisition of materials from a vendor d. record and electronically transmit materials data in place of a receiving report ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 128. Period costs are a. found on the balance sheet b. not involved in the production process c. classified as direct labor, direct material, or factory overhead d. found on the job order cost sheets ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 5:58 PM

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Chapter 19 - Job Order Costing 129. Cavy Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead totaled $141,800, determine the over- or underapplied amount for the month. a. $7,575 underapplied b. $35,220 underapplied c. $7,575 overapplied d. $35,220 overapplied ANSWER: RATIONALE:

c Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $1,250,000/40,000 = $31.25 per machine hour Applied Factory Overhead Costs = Predetermined Overhead Rate × Actual Machine Hours = $31.25 × 4,780 machine hours = $149,375 Amount of Overapplied Overhead = Applied Factory Overhead – Actual Factory Overhead = $149,375 – $141,800 = $7,575 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 8:34 PM

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Chapter 19 - Job Order Costing 130. Period costs are classified as either a. selling expenses or production expenses b. administrative expense or production expenses c. selling expenses or administrative expenses d. general expenses or selling expenses ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:23 PM

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Chapter 19 - Job Order Costing 131. Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300. The actual factory overhead costs for the year were $1,375,000. Determine the over- or underapplied amount for the year. a. $17,500 overapplied b. $17,500 underapplied c. $118,250 overapplied d. $118,250 underapplied ANSWER: RATIONALE:

b Predetermined Overhead Rate = Estimated Total Factory Overhead Costs/Estimated Activity Base = $1,250,000/50,000 = $25 per machine hour Applied Factory Overhead Costs = Predetermined Overhead Rate × Actual Machine Hours = $25 × 54,300 machine hours = $1,357,500 Amount of Underapplied Overhead = Actual Factory Overhead – Applied Factory Overhead = $1,375,000 – $1,357,500 = $17,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:24 PM

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Chapter 19 - Job Order Costing 132. Sanders Inc. has applied $567,988 of overhead to jobs in the cost ledger. Actual overhead at the end of the year is $575,000. The adjustment for over- or underapplied overhead is a. $7,012 overapplied, increase Cost of Goods Sold b. $7,012 underapplied, increase Cost of Goods Sold c. $7,012 overapplied, decrease Cost of Goods Sold d. $7,012 underapplied, decrease Cost of Goods Sold ANSWER: RATIONALE:

b Amount of Underapplied Overhead = Actual Overhead – Applied Overhead = $575,000 – $567,988 = $7,012 This will increase Cost of Goods Sold. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:25 PM 133. All of the following are true regarding product costs except a. product costs are found on the balance sheet until they are sold b. product costs consist of direct labor, direct materials, and factory overhead c. product costs can be found in three accounts on the balance sheet d. product costs include sales and administrative expenses ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:25 PM

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Chapter 19 - Job Order Costing 134. Job cost sheets can provide information to managers for all of the following except a. the cost impact of materials changes b. the cost impact of continuous improvement in the manufacturing process c. the cost impact of materials price or direct labor rate changes over time d. utilities, managerial salaries, and depreciation of computers in the corporate office ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:26 PM 135. A difference in quantity of materials used on two comparable jobs may be caused by a. inadequately trained employees b. poor quality materials c. employee carelessness d. All of these choices ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 136. Which of the following would not be found in the accounting system of a service provider? a. cost ledger b. finished goods ledger c. deferred revenue account d. job cost sheets ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:27 PM 137. Which of the following entries would not be found on the books of a service provider? a. a debit to Work in Process and a credit to Materials b. a debit to Work in Process and a credit to Wages Payable c. a debit to Work in Process and a credit to Overhead d. a debit to Cost of Services and a credit to Work in Process ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 7:27 PM

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Chapter 19 - Job Order Costing 138. In a job order cost accounting system used by a service business, which of the following items would normally not be included as part of overhead? a. materials b. direct labor c. rent d. supplies ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:24 PM 139. The direct labor and overhead costs of providing services to clients are accumulated in a. finished services expense b. work in process c. administrative salaries expense d. overhead ANSWER: POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 140. When a job is completed in a service organization, the job costs are transferred to the a. work in process account b. cost of services account c. finished goods account d. cost of goods sold account ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 6:25 PM Matching Match each of the following phrases with the term (a–g) that it most closely describes. a. Job order cost system b. Process cost system c. Activity-based costing d. Underapplied overhead e. Overapplied overhead f. Finished goods ledger g. Materials ledger DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:08 PM

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Chapter 19 - Job Order Costing 141. A system that uses a different overhead rate for each activity ANSWER: c POINTS: 1 142. A subsidiary ledger that maintains a separate account for each type of material ANSWER: g POINTS: 1 143. Applied overhead is more than actual overhead incurred ANSWER: e POINTS: 1 144. Typically used by companies that make custom products ANSWER: a POINTS: 1 145. Typically used by companies whose products are indistinguishable from each other ANSWER: b POINTS: 1 146. The stock ledger ANSWER: f POINTS: 1 147. Applied overhead is less than actual overhead incurred ANSWER: d POINTS: 1 Match the costs that follow to the type of product cost (a–c) or designate as not a product cost (d). a. Direct labor b. Direct materials c. Factory overhead d. Not a product cost DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:09 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19 - Job Order Costing 148. Factory depreciation ANSWER: c POINTS: 1 149. President’s salary ANSWER: d POINTS: 1 150. Salespeople commissions ANSWER: d POINTS: 1 151. Wood ANSWER: b POINTS: 1 152. Factory supervisor’s salary ANSWER: c POINTS: 1 153. Assembler’s wages ANSWER: a POINTS: 1 154. Plastic parts ANSWER: b POINTS: 1 155. Machine operator ANSWER: a POINTS: 1 156. Maintenance supplies ANSWER: c POINTS: 1

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Chapter 19 - Job Order Costing Match each of the following phrases with the term (a–e) that it most closely describes it. Each term will be used only once. a. Job cost sheets b. Materials requisitions c. Receiving report d. Time tickets e. Cost allocation DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:09 PM 157. The process by which factory overhead is assigned to a cost object ANSWER: e POINTS: 1 158. These make up the work in process subsidiary ledger ANSWER: a POINTS: 1 159. Serve as the basis for recording direct labor on a job cost sheet ANSWER: d POINTS: 1 160. Prepared when materials that have been ordered are received and inspected ANSWER: c POINTS: 1 161. Serve as the basis for recording materials used ANSWER: b POINTS: 1

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Chapter 19 - Job Order Costing Subjective Short Answer 162. Define and discuss the two main types of cost accounting systems for manufacturing operations. What are their similarities and differences? ANSWER:

The two main types of cost accounting systems are job order cost systems and process cost systems. A job order cost system provides product costs for each quantity of product that is manufactured. Each quantity of product that is produced is called a job. This type of system is used by companies that manufacture custom products or batches of similar products. A process cost system provides product costs for each manufacturing department or process. Process cost systems are used by companies that manufacture products that are indistinguishable from each other and manufactured using a continuous process.

They are similar in that both systems are widely used and a company may use both —job order for some products and process costing for others. POINTS: 1 DIFFICULTY: Bloom's: Remembering Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-01 - 19-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:14 PM

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Chapter 19 - Job Order Costing 163. Record the journal entries for the following transactions: 1. 2. 3.

March 10: 500 units of raw materials were purchased on account at $4.00 per unit. March 15: 250 units of raw materials were requisitioned at $4.50 per unit for production, Job 872. March 25: 215 units of raw materials were requisitioned at $5.00 per unit for production, Job 879.

ANSWER:

Mar. 10

Materials Accounts Payable

2,000

Work in Process Materials

1,125

Work in Process Materials

1,075

2,000

1,125

1,075

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:11 PM 164. Cavy Company accumulated 560 hours of direct labor on Job 345 and 800 hours on Job 777. The direct labor was incurred at a rate of $20 per direct labor hour for Job 345 and $21 per direct labor for Job 777. Journalize the entry to record the flow of labor costs into production. Work in Process 28,000* Wages Payable *(560 × $20) + (800 × $21) = $28,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:14 PM ANSWER:

28,000

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Chapter 19 - Job Order Costing 165. During April, Cavy Company incurred factory overhead as follows: Indirect materials Factory supervision labor Utilities Depreciation (factory) Small tools Equipment rental

$11,000 4,000 500 700 300 750

Record the entry for factory overhead incurred during April. ANSWER:

Factory Overhead Materials Wages Payable Utilities Payable Accumulated Depreciation Small Tools Equipment Rental Payable

17,250 11,000 4,000 500 700 300 750

POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 166. Cavy Company estimates that total factory overhead costs will be $660,000 for the year. Direct labor hours are estimated to be 100,000. (a) Determine the: (1) Predetermined factory overhead rate (2) Amount of factory overhead applied to Job 345 if the amount of direct labor hours is 560 and Job 777 if the amount of direct labor hours is 800 (b) Prepare the journal entry to apply factory overhead for April according to the predetermined overhead rate. ANSWER:

(a) (1)

$660,000/100,000 = $6.60

(2) Job 345: 560 hrs. × $6.60 = $3,696 Job 777: 800 hrs. × $6.60 = $5,280 (b) Work in Process Factory Overhead

8,976 8,976

POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 167. Cavy Company estimates that the factory overhead for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. Calculate the predetermined overhead rate to apply factory overhead. ANSWER: POINTS: DIFFICULTY:

$1,470,000/40,000 = $36.75 per machine hour 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:13 PM 168. Cavy Company estimates that the factory overhead for the following year will be $1,250,000. The company has determined that the basis for applying factory overhead will be machine hours, which is estimated to be 40,000 hours. There are 4,780 machine hours for all of the jobs in the month of April. What amount will be applied to all of the jobs for the month of April? ANSWER:

$1,250,000/40,000 hours = $31.25 4,780 hours × $31.25 = $149,375 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:47 AM

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Chapter 19 - Job Order Costing 169. Cavy Company estimates that the factory overhead for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. Prepare the journal entry to apply factory overhead. Work in Process 175,665* Factory Overhead *($1,470,000/40,000) × 4,780 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:15 PM ANSWER:

175,665

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Chapter 19 - Job Order Costing 170. At the end of April, Cavy Company had completed Jobs 766 and 765. The individual job cost sheets reveal the following information: Job Job No. 765 Job No. 766

Direct Materials $5,670 8,900

Direct Labor $3,500 4,775

Machine Hours 27 44

Job 765 produced 152 units, and Job 766 consisted of 250 units. Assuming that the predetermined overhead rate is applied by using machine hours at a rate of $200 per hour, determine the (a) balance on the job cost sheets for each job and (b) the cost per unit at the end of April.

ANSWER:

(a) Job No. 765 = $14,570 [$5,670 + $3,500 + (27 × $200)] Job No. 766 = $22,475 [$8,900 + $4,775 + (44 × $200)] (b) Job No. 765 = $95.86 ($14,570/152) Job No. 766 = $89.90 ($22,475/250)

POINTS: DIFFICULTY:

$405,000 + (15,000 × $82.30) = $1,639,500 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:16 PM

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Chapter 19 - Job Order Costing 172. Cavy Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead totaled $141,800, determine the over- or underapplied amount for the month. ANSWER:

$1,250,000/40,000 = $31.25 $31.25 × 4,780 = $149,375 factory overhead applied $141,800 – $149,375 = $7,575 overapplied POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/8/2017 8:48 AM

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Chapter 19 - Job Order Costing 173. Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,375,000. (a) Determine the total factory overhead amount applied. (b) Calculate the over- or underapplied amount for the year. (c) Prepare the journal entry to close Factory Overhead into Cost of Goods Sold. (a) ANSWER:

$1,250,000/50,000 = $25 54,300 hours × $25 = $1,357,500

(b) $1,375,000 actual – $1,357,500 applied = $17,500 underapplied (c) Cost of Goods Sold Factory Overhead

17,500 17,500

POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 174. Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,348,800. (a) Determine the total factory overhead amount applied. (b) Calculate the over- or underapplied amount for the year. (c) Prepare the journal entry to close Factory Overhead into Cost of Goods Sold. (a) ANSWER:

$1,250,000/50,000 = $25 54,300 hours × $25 = $1,357,500

(b) $1,348,800 actual – $1,357,500 applied = $8,700 overapplied (c) Factory Overhead Cost of Goods Sold

8,700 8,700

POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 175. Cranston Company estimates the following overhead costs for the coming year: Equipment depreciation Equipment maintenance Supervisory salaries Factory rent Total

$160,000 60,000 40,000 100,000 $360,000

Cranston is also budgeting $600,000 in direct labor costs and 15,000 machine hours for the coming year. (a) Calculate the predetermined overhead rate using direct labor costs as the allocation base. (b) Calculate the predetermined overhead rate using machine hours as the allocation base. ANSWER: (a)

$360,000/$600,000 = 60% of direct labor costs

(b) $360,000/15,000 machine hours = $24 per machine hour POINTS: DIFFICULTY:

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Chapter 19 - Job Order Costing 176. Flagler Company allocates overhead based on machine hours. It estimated overhead costs for the year to be $420,000. Estimated machine hours were 50,000. Actual hours and costs for the year were 46,000 machine hours and $380,000 of overhead. (a) Calculate the predetermined factory overhead rate for the year. (b) What is the amount of applied overhead for the year? What is the amount of under- or overapplied overhead for the year? Indicate whether it is over- or (c) underapplied. ANSWER:

(a)

$420,000/50,000 = $8.40 per machine hour

(b)

$8.40 × 46,000 = $386,400

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Chapter 19 - Job Order Costing 177. Jase Company allocates overhead based on a predetermined overhead rate of $9.00 per direct labor hour. Job J904 required 8 tons of direct material at a cost of $600 per ton and took employees who earn $21 per hour a total of 80 hours to complete. What is the total cost of Job J904? ANSWER:

Direct materials Direct labor Manufacturing overhead Total cost of J904

8 tons × $600 80 hours × $21 80 hours × $9

$4,800 1,680 720 $7,200

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:20 PM 178. Technics Inc., a manufacturing company, utilizes job order costing. Each division establishes its own estimates regarding overhead, which are as follows: Division A $128,000 16,000 $155,000

Total estimated overhead Total estimated machine hours Total estimated direct labor hours

Division B $261,000 72,500 $290,000

If Division A allocates overhead on the basis of machine hours and Division B allocates overhead as a percentage of direct labor costs, what would the predetermined overhead rate be for each division? ANSWER:

$128,000/16,000 = $8 per machine hour

$261,000/$290,000 = 90% of direct labor costs POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:21 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19 - Job Order Costing 179. Crain Company budgeted 35,000 direct labor hours and incurred 40,000 direct labor hours. It incurred $780,000 of overhead and estimated overhead was $735,000. What is Crain’s predetermined overhead rate? Was overhead over- or underapplied for the year? By how much? ANSWER:

Predetermined overhead rate: $735,000/35,000 = $21 per direct labor hour

Applied overhead $840,000* Actual overhead 780,000 Overapplied overhead $ 60,000 *$21 × 40,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:01 PM

Page 101

Chapter 19 - Job Order Costing 180. National Survey Company uses a job order cost system. (a) Indicate the source of the data for debiting Work in Process for each of the following: (1) Direct materials requisitioned (2) Direct labor used (b)

Indicate the source of the data for crediting Work in Process for jobs completed.

(c)

Present a list of the three controlling accounts used in the general ledger to record the inventories and, in each case, indicate the related subsidiary ledger.

ANSWER:

(a) (1) (2)

Summary of materials requisitions Summary of time tickets

(b) Summary of job cost sheets for jobs completed (c)

Controlling Account Materials Work in Process Finished Goods

Subsidiary Ledger Materials ledger Cost ledger Finished goods ledger (or stock ledger)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/5/2017 10:22 PM

Page 102

Chapter 19 - Job Order Costing 181. During August, the receipts and distributions of Material No. B4G9 are as follows:

Aug. 3 16 29

Received 1,100 units at $15 1,700 units at $17 900 units at $18

Aug. 11 18 30

Issued 700 units for Job No. 116 1,900 units for Job No. 117 800 units for Job No. 118

(a) Determine the cost of each of the three issues under a perpetual system, using the first-in, first-out method. (b) Present the journal entry to record the issuance of the materials for the month, assuming that the cost of issuances is determined by the first-in, first-out method. ANSWER:

(a)

Aug. 11 issue: 18 issue: 31 issue:

(b)

Work in Process Materials

700 × $15 (400 × $15) + (1,500 × $17) (200 × $17) + (600 × $18)

$10,500 31,500 14,200 $56,200

56,200 56,200

POINTS: DIFFICULTY:

Page 103

Chapter 19 - Job Order Costing 182. A summary of the time tickets for August follows: Description Job No. 321 Job No. 329 Job No. 336

Amount $11,000 9,200 5,000

Description Job No. 342 Job No. 346 Indirect labor

Amount $8,300 5,700 8,000

Present the journal entries to record (a) the labor cost incurred and (b) the application of factory overhead to production for August. The factory overhead rate is 70% of direct labor cost. ANSWER:

(a)

(b)

Work in Process Factory Overhead Wages Payable

39,200 8,000

Work in Process Factory Overhead

27,440

47,200

27,440

POINTS: DIFFICULTY:

July 1 Balance Direct materials Direct labor

Work in Process 60,200 147,000 120,000

Factory overhead is applied to jobs at the rate of 60% of direct labor cost. The actual factory overhead incurred for July was $75,000. Jobs completed during the month totaled $301,200. (a) Prepare the journal entries to record (1) the application of factory overhead to production during July and (2) the jobs completed during July. (b) What is the balance of the factory overhead account on July 31? (c) Was factory overhead over- or underapplied on July 31? (d) Determine the balance of Work in Process on July 31. Copyright Cengage Learning. Powered by Cognero.

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Chapter 19 - Job Order Costing ANSWER:

(a) (1) Work in Process Factory Overhead

72,000

(2) Finished Goods Work in Process

301,200

72,000

301,200

(b) $3,000 debit (c) Underapplied (d) Total debits to Work in Process: Balance, July 1 Direct materials Direct labor Factory overhead Less cost of goods finished, during July Balance, Work in Process, July 31

$ 60,200 147,000 120,000 72,000

$399,200 301,200 $ 98,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 1:03 PM 184. Present entries to record the following summarized operations related to production for a company using a job order cost system: (a) (b) (c)

(d)

(e) (f) (g) (h) (i) (j)

Materials purchased on account Prepaid expenses incurred on account Materials requisitioned: For production orders For general factory use Factory labor used: On production orders For general factory purposes Depreciation on factory equipment Expiration of prepaid expenses, chargeable to factory Factory overhead costs incurred on account Factory overhead applied, based on machine hours Jobs finished Jobs shipped to customers:

$176,000 12,200 153,700 2,700 141,300 12,000 37,000 6,100 76,000 105,300 415,300 Page 105

Chapter 19 - Job Order Costing Selling price (assume all sold on account) Cost of goods sold ANSWER:

638,000 412,000

(a) Materials Accounts Payable

176,000

(b) Prepaid Expenses Accounts Payable

12,200

153,700 2,700

(d) Work in Process Factory Overhead Wages Payable

141,300 12,000

(e) Factory Overhead Accumulated Depreciation— Factory Equipment

37,000

(f) Factory Overhead Prepaid Expenses

6,100

(g) Factory Overhead Accounts Payable

76,000

(h) Work in Process Factory Overhead

105,300

(i) Finished Goods Work in Process

415,300

(j) Accounts Receivable Sales

638,000

(j) Cost of Goods Sold Finished Goods

412,000

176,000

12,200

156,400

153,300

37,000

6,100

76,000

105,300

415,300

638,000

412,000

POINTS: DIFFICULTY:

Page 106

Chapter 19 - Job Order Costing DATE CREATED: DATE MODIFIED:

1/16/2017 4:17 PM 3/6/2017 7:09 PM

185. The balance of Material Q on May 1 and the receipts and issuances during May are as follows: Balance, May 1 Received, May 11 Received, May 25

8 at $32 23 at $33 15 at $35

Issued, May 17 Issued, May 27

14 18

Determine the cost of each of the issuances under a perpetual system, using the FIFO method. ANSWER:

May 17 issue: May 27 issue:

(8 × $32) + (6 × $33) = $454 (17 × $33) + (1 × $35) = $596

POINTS: DIFFICULTY:

Page 107

Chapter 19 - Job Order Costing 186. Prepare the journal entry for materials and labor, based on the following: Raw materials issued: Job No. 609, $850; for general use in factory, $600 Labor time tickets: Job No. 609, $1,600; $400 for supervision ANSWER:

Work in Process Factory Overhead Raw Materials

850 600

Work in Process Factory Overhead Wages Payable

1,600 400

1,450

2,000

POINTS: DIFFICULTY:

Page 108

Chapter 19 - Job Order Costing 187. Six selected transactions for the current month are indicated by letters in the following T accounts in a job order cost accounting system: Materials (a)

Wages Payable (b) Factory Overhead (a) (c) (b) (f)

Work in Process (a) (d) (b) (c) (f)

Finished Goods (d) (e) (f)

Cost of Goods Sold (e) (f) Describe each of the six transactions. (a) Direct and indirect materials are issued (b) Direct and indirect labor costs are incurred (c) Factory overhead is applied (d) Completed goods are transferred to finished goods (e) Goods are sold (f) Underapplied overhead is allocated POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 1:20 PM ANSWER:

188. On November 2, Newsprint Manufacturing purchases 5 rolls of paper on account at $125 per roll for use within the production process. On November 5, 4 rolls of this paper are issued to Job 157A in the Printing Department. The Printing Department records $675 in direct labor and $1,150 of factory overhead to Job 157A. On November 8, Printing transfers Job 157A to the Folding Department. The Folding Department applies $450 in direct labor and $655 in factory overhead to Job 157A. Job 157A is transferred to finished goods inventory on November 9. (a) Journalize the purchase of the paper. (b) Journalize the transfer of raw materials to work in process, the application of direct labor, and the application of manufacturing overhead to Job 157A while in the Printing Department. Copyright Cengage Learning. Powered by Cognero.

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Chapter 19 - Job Order Costing

(c) Journalize the transfer of Job 157A to the Folding Department at actual cost. (d) Journalize the application of direct labor and the application of manufacturing overhead to Job 157A while in the Folding Department. (e) Journalize the transfer of Job 157A to finished goods inventory at actual cost. ANSWER:

(a)

(b)

Nov. 2

Nov. 5

(c)

(d)

Nov. 8

(e)

Nov. 9

Raw Materials Accounts Payable

625

Work in Process—Printing Raw Materials

500

Work in Process—Printing Wages Payable

675

Work in Process—Printing Factory Overhead

1,150

Work in Process—Folding Work in Process—Printing

2,325

Work in Process—Folding Work in Process—Printing

450

Work in Process—Folding Factory Overhead

655

Finished Goods Work in Process—Folding

3,430

625

500

675

1,150

2,325

450

655

3,430

POINTS: DIFFICULTY:

Page 110

Chapter 19 - Job Order Costing 189. On May 15, the Stamping Department accepted Job 051507A to make 1,000 funnels. Materials requisitioned were 1,100 sheets at $1.20 per sheet and 1,150 grommets at $0.15 per set. The cost driver used by the Stamping Department is the drop-forge strokes indicated by a machine-mounted counter. Overhead is applied at $2.25 for each drop-forge stroke. Additionally, $375 of overhead is applied to each job due to setup and tear down. Direct labor is applied at $22.50 per hour for the machine operator and $11.10 for the machine loader. The job required 6.5 hours of labor. Upon completion, the job was transferred to finished goods inventory. Journalize all events as of May 15. ANSWER:

May 15

Work in Process Raw Materials *(1,100 × $1.20) + ($1,150 × $0.15)

1,492.50*

Work in Process Factory Overhead *$375 + (1,115 × $2.25)

2,883.75*

Work in Process Wages Payable *($22.50 + $11.10) × 6.5 hrs.

218.40*

Finished Goods Inventory Work in Process *1,492.50 + $2,883.75 + $218.40

4,594.65*

1,492.50

2,883.75

218.40

4,594.65

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 7:12 PM 190. On November 14, the Milling Department accepted Job 111407A for 1,000 pounds of cereal mix. Materials: Oats Wheat Barley Malt Honey Water

Standard Qty. 525 pounds 450 pounds 85 pounds 65 pounds 25 quarts 25 gallons

Standard Cost $1.25 per pound $1.15 per pound $1.45 per pound $2.15 per pound $1.20 per quart $0.45 per gallon Page 111

Chapter 19 - Job Order Costing Time: Miller Loader

4.5 hours 1.5 hours

$22.75 per hour $11.50 per hour

Overhead is applied at $5.75 per pound completed. The recipe produced 1,025 pounds of cereal mix. (a) Record the journal entry to transfer raw materials to Job 111407A. (b) Record the journal entry for direct labor incurred for Job 111407A. (c) Record the journal entry to apply manufacturing overhead to Job 111407A. (d) Record the journal entry to transfer Job 111407A to finished goods on November 14. ANSWER:

(a)

(b)

(c)

(d)

Nov. 14

Work in Process Materials *(525 × $1.25) + ($450 × $1.15) + (85 × $1.45) + (65 × $2.15) + (25 × $1.20) + (25 × $0.45)

1,478.00*

Work in Process Wages Payable *(4.5 × $22.75) + (1.5 × $11.50)

119.63*

1,478.00

119.63

Work in Process Overhead *1,025 × $5.75

5,893.75*

Finished Goods Work in Process *1,478.00 + $119.63 + $5,893.75

7,491.38*

5,893.75

7,491.38

POINTS: DIFFICULTY:

Page 112

Chapter 19 - Job Order Costing 191. Put the following in the order of the flow of manufacturing costs for a company: (a) (b) (c) (d) (e) (f) (g) (h)

Closing under/overapplied factory overhead to cost of goods sold Materials purchased Factory labor used and factory overhead incurred in production Completed jobs moved to finished goods Factory overhead applied to jobs according to the predetermined overhead rate Materials requisitioned to jobs Selling of finished product Preparation of financial statements to determine gross profit

ANSWER: (b) Materials purchased (f) Materials requisitioned to jobs (c) Factory labor used and factory overhead incurred in production Factory overhead applied to jobs according to the predetermined overhead (e) rate (d) Completed jobs moved to finished goods (a) Closing under/overapplied factory overhead to cost of goods sold (g) Selling of finished product (h) Preparation of financial statements to determine gross profit POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 7:13 PM

Page 113

Chapter 19 - Job Order Costing 192. At the end of the period, Carson Company had the following balances in selected accounts: Materials Finished goods Work in process Cost of goods sold Factory overhead

80,000 190,000 70,000 1,000,000 30,000

(a) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a debit balance. What does a debit balance mean? (b) The factory overhead balance is relatively small; prepare the journal entry to close the factory overhead account assuming a credit balance. What does a credit balance mean?

ANSWER:

(a)

Cost of Goods Sold Factory Overhead

30,000 30,000

A debit balance indicates that the factory overhead was underapplied. (b)

Factory Overhead Cost of Goods Sold

30,000 30,000

A credit balance indicates that the factory overhead was overapplied. POINTS: DIFFICULTY:

Telephone cable for a telephone company Membership fees for a health club for executives Salary of the director of internal auditing Long-distance telephone bill for calls made by salespersons Carrying cases for a manufacturer of video camcorders Cotton for a textile manufacturer of blue jeans Bandages for the emergency room of a hospital

Page 114

Chapter 19 - Job Order Costing (h) Cost of company holiday party (i) Electricity used to operate factory machinery (j) State unemployment compensation taxes for factory workers (k) Gloves for factory machine operators (l) Fees paid for lawn service for office grounds (m) Salary of secretary to vice president of finance (n) Salary of secretary to vice president of marketing (o) Production supervisor's salary (p) Engine oil for manufacturer and distributor of motorcycles (q) Oil lubricants for factory plant and equipment (r) Cost of a radio commercial (s) Depreciation on factory equipment (t) Wages of checkout clerk in company-owned retail outlet (u) Maintenance and repair costs for factory equipment (v) Depreciation on office equipment (w) Bonuses paid to salespersons (x) Insurance on factory building (y) Training for accounting personnel on use of microcomputer (z) Steel for a construction contractor Classify each of the preceding costs as product costs or period costs. For those costs classified as product costs, indicate whether the product cost is a direct materials cost, direct labor cost, or factory overhead cost. For those costs classified as period costs, indicate whether the period cost is a selling expense or an administrative expense. Use the following tabular headings for preparing your answer. Place an X in the appropriate column. Product Cost Period Cost Direct Direct Factory Materials Labor Overhead Selling Administrative Cost Expense Expense Cost Cost Cost ANSWER: Product Cost Direct Direct Factory Materials Labor Overhead Cost Cost Cost Cost (a) X (b) (c) (d) (e) X (f) X (g) X (h) (i) X (j) X (k) X (l) (m) (n) Copyright Cengage Learning. Powered by Cognero.

Period Cost Selling Administrative Expense Expense X X X

X X X Page 115

Chapter 19 - Job Order Costing (o) (p) (q) (r) (s) (t) (u) (v) (w) (x) (y) (z)

X X X X X X X X X X X X

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 7:15 PM

Page 116

Chapter 19 - Job Order Costing 194. List the accounts used in the cost flow for (a) a manufacturer and (b) a service provider. (a) Materials Wages Payable Factory Overhead Work in Process Finished Goods Cost of Goods Sold (b) Supplies Wages Payable Overhead Work in Process Cost of Services POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-02 - 19-02 ACCT.WARD.18.19-04 - 19-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 6:36 PM ANSWER:

Page 117

Chapter 19 - Job Order Costing 195. Discuss how job order cost information is used in decision making. What are some possible reasons that actual cost of materials would exceed expected costs for a job? ANSWER:

Since a job order cost system provides product costs for each quantity of product that is manufactured, total and unit product costs can be compared to similar jobs or expected costs. Thus, a job order cost system can be used by managers for cost evaluation and control.

Possible reasons that actual material costs would exceed expected cost include poorly trained employees, poor quality materials, faulty equipment, or incorrect instructions. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 7:16 PM 196. Discuss the use of job order costing for professional services businesses. What are the similarities and differences between service and manufacturing business job order costing? ANSWER:

Professional service providers—attorneys, physicians, advertising agencies, etc.— may use job order cost accounting systems. In such cases, clients are considered jobs.

Like manufacturers, direct labor and overhead costs for service companies are accumulated in work in process accounts. Unlike manufacturers, materials costs for service companies are usually insignificant and treated as overhead. When a job is completed, it is transferred to cost of services, which is similar to cost of goods sold. Service companies do not use finished goods accounts. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.19-03 - 19-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.34 - Job Order Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:17 PM DATE MODIFIED: 3/6/2017 7:16 PM Copyright Cengage Learning. Powered by Cognero.

Page 118

Chapter 20 - Process Cost Systems True / False 1. Process manufacturing usually reflects a manufacturer that produces small quantities of unique items. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 2. Process cost systems use job order cost cards to accumulate cost data. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 20 - Process Cost Systems 3. Both process and job order cost systems maintain perpetual inventory accounts with subsidiary ledgers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 4. If the principal products of a manufacturing process are identical, a process cost system is more appropriate than a job order cost system. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 20 - Process Cost Systems 5. If the products of a manufacturing process are produced to customer specifications, a process cost system is more appropriate than a job order cost system. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 6. Process manufacturers typically use large machines to process a continuous flow of raw materials into a finished state. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 20 - Process Cost Systems 7. In a process costing system, each process will have a work in process inventory account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 8. Industries that typically use process cost systems include chemicals, oil, metals, food, paper, and pharmaceuticals. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

Page 4

Chapter 20 - Process Cost Systems 9. Equivalent units are the sum of direct materials used and direct labor incurred. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 10. Direct materials, direct labor, and factory overhead are assigned to each manufacturing process in a process costing system. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 20 - Process Cost Systems 11. Custom-made goods would be accounted for using a process costing system. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 12. In a process costing system, a separate work in process inventory account is maintained for each customer’s job. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 13. In a process cost system, product costs are accumulated by processing department rather than by job. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 14. Conversion costs include materials, direct labor, and factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 15. The direct materials costs and direct labor costs incurred by a production department are referred to as conversion costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 16. The direct labor costs and factory overhead costs incurred by a production department are referred to as conversion costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 17. The first step in determining the cost of goods completed and ending inventory valuation using process costing is to calculate equivalent units of production. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 18. Conversion costs are usually incurred evenly throughout a process. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 19. Equivalent units of production are the number of units that could have been manufactured from start to finish during an accounting period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 20. Both job order and process cost accounting use equivalent units of production to determine costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 21. If 30,000 units of materials enter production during the first year of operations, 25,000 of the units are finished, and 5,000 are 50% completed, the number of equivalent units of production would be 28,500. a. True b. False ANSWER: RATIONALE:

False Number of Equivalent Units = Units Started and Completed + (% of Completion × Inventory in Process) = 25,000 units + (50% × 5,000 units) = 25,000 units + 2,500 units = 27,500 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 22. If 16,000 units of materials enter production during the first year of operations, 12,000 of the units are finished, and 4,000 are 75% completed, the number of equivalent units of production would be 15,000. a. True b. False ANSWER: RATIONALE:

True Number of Equivalent Units = Units Started and Completed + (% of Completion × Inventory in Process) = 12,000 units + (75% × 4,000 units) = 12,000 units + 3,000 units = 15,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 23. If the costs of direct materials, direct labor, and factory overhead were $277,300, $52,600, and $61,000, respectively, for 14,000 equivalent units of production, the total conversion cost was $390,900. a. True b. False ANSWER: RATIONALE:

False Total Conversion Costs = Direct Labor + Factory Overhead = $52,600 + $61,000 = $113,600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 24. If the costs of direct materials, direct labor, and factory overhead were $60,000, $35,000, and $25,000, respectively, for 20,000 equivalent units of production, the conversion cost per equivalent unit was $6. a. True b. False ANSWER: RATIONALE:

False Conversion Cost per Equivalent Unit = Total Conversion Costs for the Period/Total Equivalent Units of Conversion Costs = (Direct Labor + Factory Overhead)/Total Equivalent Units of Conversion Costs = ($35,000 + $25,000)/20,000 units = $3 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 25. If the costs of direct materials, direct labor, and factory overhead were $522,200, $82,700, and $45,300, respectively, for 16,000 equivalent units of production, the conversion cost per equivalent unit was $8. a. True b. False ANSWER: RATIONALE:

True Conversion Cost per Equivalent Unit = Total Conversion Costs for the Period/Total Equivalent Units of Conversion Costs = (Direct Labor + Factory Overhead)/Total Equivalent Units of Conversion Costs = ($82,700 + $45,300)/16,000 units = $8 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 1:28 PM

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Chapter 20 - Process Cost Systems 26. If 10,000 units that were 50% completed were in process on November 1, 90,000 units were completed during November, and 20,000 units were 20% completed on November 30, the number of equivalent units of production for November was 90,000. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False ANSWER: RATIONALE:

False Number of Equivalent Units of Production for November = (Inventory in Process, November 1 × % of Completion in November) + Started and Completed in November + (Inventory in Process, November 30 × % of Completion in November) = (10,000 units × 50%) + (90,000 units – 10,000 units) + (20,000 units × 20%) = 5,000 units + 80,000 units + 4,000 units = 89,000 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 27. If 10,000 units that were 40% completed were in process on November 1, 80,000 units were completed during November, and 12,000 units were 20% completed on November 30, the number of equivalent units of production for November was 75,600. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False ANSWER: RATIONALE:

False Number of Equivalent Units of Production for November = (Inventory in Process, November 1 × % of Completion in November) + Started and Completed in November + (Inventory in Process, November 30 × % of Completion in November) = [10,000 units × (100% – 40%)] + (80,000 units – 10,000 units) + (12,000 units × 20%) = 6,000 units + 70,000 units + 2,400 units = 78,400 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 28. In applying the first-in, first-out method of costing inventories, if 8,000 units that are 30% completed are in process on June 1, 28,000 units are completed during June, and 4,000 units are 75% completed on June 30, the number of equivalent units of production for June is 33,400. a. True b. False ANSWER: RATIONALE:

False Number of Equivalent Units of Production for June = (Inventory in Process, June 1 × % of Completion in June) + Started and Completed in June + (Inventory in Process, June 30 × % of Completion in June) = [8,000 units × (100% – 30%)] + (28,000 units – 8,000 units) + (4,000 units × 75%) = 5,600 units + 20,000 units + 3,000 units = 28,600 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 29. In applying the first-in, first-out method of costing inventories, if 8,000 units that are 30% completed are in process on June 1, 28,000 units are completed during June, and 4,000 units are 80% completed on June 30, the number of equivalent units of production for June is 28,600. a. True b. False ANSWER: RATIONALE:

False Number of Equivalent Units of Production for June = (Inventory in Process, June 1 × % of Completion in June) + Started and Completed in June + (Inventory in Process, June 30 × % of Completion in June) = [8,000 units × (100% – 30%)] + (28,000 units – 8,000 units) + (4,000 units × 80%) = 5,600 units + 20,000 units + 3,200 units = 28,800 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 30. The cost of production report reports the cost of the goods sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 31. The cost of production report reports the costs charged to production and the costs allocated to finished goods and work in process. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 1:37 PM 32. The cost of production report summarizes (1) the units for which the department is accountable and the units to be assigned costs and (2) the costs charged to the department and the allocation of those costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 33. One of the differences in accounting for a process costing system compared to a job order system is that the amounts used to transfer goods from one department to the next come from the cost of production report instead of job cost cards. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 1:38 PM 34. One of the primary uses of a cost of production report is to assist management in controlling production costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 35. In a process costing system, costs flow into finished goods inventory only from the work in process inventory of the last manufacturing process. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 36. Conversion costs are generally added evenly throughout the process. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 37. Equivalent units should be computed separately for direct materials and conversion costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 38. Costs are transferred, along with the units, from one work in process inventory account to the next in a process costing system. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 39. In a process costing system, the cost per equivalent unit is computed before computing equivalent units. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 40. Costs of ending work in process inventory are included in the cost per equivalent unit computation. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 41. Conversion and direct materials are generally both added at the end of the production process. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 42. Gilbert Corporation had 25,000 finished units and 8,000 units 35% complete. The equivalent units totaled 30,200. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Equivalent Units = 25,000 + (8,000 × 35%) = 27,800 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 43. The last step in the preparation of a cost of production report is the calculation of equivalent units of production. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 44. Equivalent units of production are always the same as the total number of physical units finished during the period. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 45. Once equivalent units are calculated for materials, this number will also be used for direct labor and factory overhead. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 46. If a department that applies FIFO process costing starts the reporting period with 50,000 physical units that were 25% complete with respect to direct materials and 40% complete with respect to conversion, it must add 12,500 equivalent units of direct materials and 20,000 equivalent units of direct labor to complete them. a. True b. False ANSWER: RATIONALE:

False Equivalent Units of Direct Materials = 50,000 units × 75% = 37,500 Equivalent Units of Direct Labor = 50,000 units × 60% = 30,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 47. The FIFO method separates work done on beginning inventory in the previous period from work done on it in the current period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 48. When a process cost accounting system records the purchase of materials, the materials account is credited. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 49. In a process costing system, indirect materials are charged to Work in Process. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 50. The amount journalized showing the cost added to finished goods is taken from the cost of production report. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 51. A process cost accounting system records all actual factory overhead costs directly in the work in process account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:14 PM 52. The entry to transfer goods in process from Department X to Department Y includes a debit to Work in Process— Department X. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 53. All costs of the processes in a process costing system ultimately pass through the cost of goods sold account. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:14 PM 54. Yield measures the ratio of the materials output quantity to the materials input quantity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-04 - 20-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 55. In lean manufacturing, processing functions are combined into work centers, sometimes called departments. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:15 PM 56. Companies recognizing the need to simultaneously produce products with high quality, low cost, and instant availability have adopted a lean manufacturing philosophy. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:16 PM

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Chapter 20 - Process Cost Systems 57. The closer a company moves toward lean manufacturing processing, the more differences in unit costs between average costing and FIFO will be reduced. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:17 PM 58. Companies that use the average costing method for process costing have unit costs that include costs from more than one accounting period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 59. If a company uses average costing instead of FIFO, it will still get the same unit costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 60. The FIFO method of process costing is simpler than the average cost method. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:17 PM

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Chapter 20 - Process Cost Systems Multiple Choice 61. For which of the following businesses would a process cost system be appropriate? a. boat repair service b. shampoo manufacturer c. dressmaker d. custom furniture manufacturer ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 62. Process and job order cost systems are similar in all of the following ways except a. both accumulate product costs—direct materials, direct labor, and factory overhead b. both allocate product costs to units produced c. both maintain perpetual inventories d. both use job order cost cards ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 63. The cost system best suited to industries that manufacture a large number of identical units of commodities on a continuous basis is a. process b. departmental c. first-in, first-out d. job order ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 64. In a process cost system, the amount of work in process inventory is valued by a. finding the sum of all open job costs b. allocating departmental costs between completed and partially completed units c. multiplying units in ending inventory by the direct materials cost per unit d. finding the sum of all completed jobs ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 65. In process cost accounting, the costs of direct materials and direct labor are charged directly to a. service departments b. processing departments c. customer accounts receivable d. job orders ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 66. The two categories of cost comprising conversion costs are a. direct labor and indirect labor b. direct labor and factory overhead c. factory overhead and direct materials d. direct labor and direct materials ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 67. In a process cost system, the cost of completed production in Department A is transferred to Department B by which of the following entries? a. debit Work in Process—Dept. B; credit Work in Process—Dept. A b. debit Work in Process—Dept. B; credit Finished Goods—Dept. A c. debit Work in Process—Dept. B; credit Cost of Goods Sold—Dept. A d. debit Finished Goods—Dept. A; credit Work in Process—Dept. B ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 68. The three categories of manufacturing costs comprising the total cost of work in process are direct labor, direct materials, and a. selling expenses b. direct expenses c. accounting salaries expense d. factory overhead ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 69. A process cost system would be appropriate for a a. natural gas refinery b. jet airplane builder c. catering business d. custom cabinet builder ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:18 PM 70. All of the following are characteristics of a process cost system except a. the system may use several work in process inventory accounts b. manufacturing costs are grouped by department rather than by job c. the system accumulates costs per job d. the system emphasizes time periods rather than the time it takes to complete a job ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:19 PM

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Chapter 20 - Process Cost Systems 71. Which of the following would use a process costing system? a. custom home builder b. custom helicopter manufacturer c. graduation photographer d. lumber mill ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 72. Which of the following is not a characteristic of a process cost system? a. Manufacturing costs are grouped by departments. b. The system may use several work in process accounts. c. The system measures costs for each completed job. d. The system allocates costs between completed and partially completed units within a department. ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 73. If a company uses a process costing system to account for the costs in its five production departments, how many work in process accounts will it use? a. 6 b. 5 c. 4 d. 2 ANSWER: POINTS: DIFFICULTY:

Allocate costs to transferred and partially completed units. Determine the units to be assigned costs. Determine the cost per equivalent unit. Calculate equivalent units of production.

The correct ordering of the steps is a. 2, 4, 3, 1 b. 4, 2, 3, 1 c. 2, 3, 4, 1 d. 2, 3, 1, 4 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:21 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems 75. Which of the following costs incurred by a paper manufacturer would be included in the group of costs referred to as conversion costs? a. accounting department costs b. raw lumber c. assembly labor's wages d. administrative salaries ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 76. Which of the following costs incurred by a tool manufacturer would not be included in conversion costs? a. factory supervisor's salary b. machine operator's wages c. raw steel d. factory maintenance personnel supplies ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 77. In the manufacture of 10,000 units of a product, direct materials cost incurred was $165,000, direct labor cost incurred was $105,000, and applied factory overhead was $53,000. What is the total conversion cost? a. $218,000 b. $158,000 c. $323,000 d. $53,000 ANSWER: RATIONALE:

b Total Conversion Cost = Direct Labor + Factory Overhead = $105,000 + $53,000 = $158,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 78. Department M had 600 units 60% completed in process at the beginning of June, 6,000 units completed during June, and 700 units 30% completed at the end of June. Using the first-in, first-out method of inventory costing, what was the number of equivalent units of production for conversion costs for the period? a. 7,300 units b. 5,640 units c. 6,700 units d. 5,850 units ANSWER: RATIONALE:

d Number of Equivalent Units of Production for Conversion Costs for June = (Inventory in Process, June 1 × % of Completion in June) + Started and Completed in June + (Inventory in Process, June 30 × % of Completion in June) = (600 × 40%) + (6,000 – 600) + (700 × 30%) = 5,850 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 79. Department M had 2,000 units 40% completed in process at the beginning of June, 12,000 units completed during June, and 1,200 units 25% completed at the end of June. What was the number of equivalent units of production for conversion costs for June if the first-in, first-out method is used to cost inventories? a. 11,500 units b. 11,200 units c. 15,200 units d. 10,000 units ANSWER: RATIONALE:

a Number of Equivalent Units of Production for Conversion Costs for June = (Inventory in Process, June 1 × % of Completion in June) + Started and Completed in June + (Inventory in Process, June 30 × % of Completion in June) = (2,000 units × 60%) + (12,000 units – 2,000 units) + (1,200 units × 25%) = 11,500 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Department G to answer the questions that follow. Department G had 3,600 units 25% completed at the beginning of the period, 11,000 units were completed during the period, 3,000 units were 20% completed at the end of the period, and the following manufacturing costs were debited to the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 units at $8) Direct labor Factory overhead

$40,000 83,200 63,000 25,000

80. All direct materials are placed in process at the beginning of production, and the first-in, first-out method of inventory costing is used. What is the total cost of the departmental work in process inventory at the end of the period (round unit cost calculations to whole dollars)? a. $16,163 b. $21,432 c. $35,670 d. $28,935 ANSWER: RATIONALE:

d Number of Equivalent Units for Conversion Costs during Period = (3,600 × 75%) + (11,000 – 3,600) + (3,000 × 20%) = 10,700 units Direct Materials Cost in Work in Process Inventory = (3,000 × $8) = $24,000 Direct Labor Cost in Work in Process Inventory = [($63,000/10,700) × 600] = $3,533 Factory Overhead in Work in Process Inventory = [($25,000/10,700) × 600] = $1,402 Total Cost of Departmental Work in Process Inventory at End of Period = $24,000 + $3,533 + $1,402 = $28,935 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dept G LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:46 PM

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Chapter 20 - Process Cost Systems 81. All direct materials are placed in process at the beginning of production, and the first-in, first-out method of inventory costing is used. What is the total cost of 3,600 units of beginning inventory that were completed during the period (round unit cost calculations to whole dollars)? a. $62,206 b. $16,163 c. $40,000 d. $19,275 ANSWER: RATIONALE:

a Total Cost of Units of Beginning Inventory = $40,000 + [($88,000/10,700) × 2,700] = $62,206 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dept G LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:47 PM

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Chapter 20 - Process Cost Systems 82. All direct materials are placed in process at the beginning of production, and the first-in, first-out method of inventory costing is used. What is the total cost of the units started and completed during the period (round unit cost calculations to whole dollars)? a. $211,200 b. $120,060 c. $190,275 d. $20,934 ANSWER: RATIONALE:

b Number of Equivalent Units for Conversion Costs during Period = (3,600 × 75%) + (11,000 – 3,600) + (3,000 × 20%) = 10,700 units Number of Units Started and Completed during Period = 11,000 – 3,600 = 7,400 units Direct Materials Cost = 7,400 × $8 =$59,200 Total Conversion Cost = [($63,000 + $25,000)/10,700] × 7,400 = $60,860 Total Cost of Units Started and Completed during Period = $59,200 + $60,860 = $120,060 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dept G LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:48 PM

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Chapter 20 - Process Cost Systems 83. Department R had 5,000 units in work in process that were 75% completed as to labor and overhead at the beginning of the period. During the period, 30,000 units of direct materials were added, 32,000 units were completed, and 3,000 units were 40% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories. The number of equivalent units of production for conversion costs for the period was a. 32,450 b. 29,450 c. 31,950 d. 26,000 ANSWER: RATIONALE:

b Number of Equivalent Units for Conversion Costs during Period = (5,000 units × 25%) + (32,000 units – 5,000 units) + (3,000 units × 40%) = 29,450 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:50 PM

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Chapter 20 - Process Cost Systems Use this information about Department S to answer the questions that follow. Department S had no work in process at the beginning of the period. It added 12,000 units of direct materials during the period at a cost of $84,000. During the period, 9,000 units were completed, and 3,000 units were 30% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. Direct labor was $49,500, and factory overhead was $9,900. 84. The total conversion costs for the period were a. $59,400 b. $49,500 c. $143,400 d. $9,900 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Total Conversion Costs for Period = $49,500 + $9,900 = $59,400 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department S LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 85. The total cost of units completed during the period was a. $117,000 b. $143,400 c. $121,000 d. $127,450 ANSWER:

RATIONALE: POINTS: DIFFICULTY:

a Number of Equivalent Units for Conversion Costs during Period = 9,000 + (3,000 × 30%) = 9,900 units Direct Materials Cost = 9,000 × ($84,000/12,000) = $63,000 Direct Labor Cost = ($49,500/9,900) × 9,000 = $45,000 Factory Overhead = ($9,900/9,900) × 9,000 = $9,000 Total cost of units completed during this period = $63,000 + $45,000 + $9,000 = $117,000

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department S LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 86. The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1, 25% completed Transferred to finished goods during June Equivalent units of production during June

1,500 units 5,000 units 5,200 units

Determine the number of equivalent units of production in the June 30, Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories. The completion percentage of 25% applies to both direct materials and conversion costs. a. 575 units b. 200 units c. 1,000 units d. 300 units ANSWER: RATIONALE:

a Number of Equivalent Units in Ending Inventory = 5,200 – (1,500 × 75%) – (5,000 – 1,500) = 575 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 3:54 PM

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Chapter 20 - Process Cost Systems 87. The debits to Work in Process—Assembly Department for May, together with data concerning production, are as follows: May 1, work in process: Materials cost, 3,000 units

$ 8,000

Conversion costs, 3,000 units, 66.7% completed

6,000

Materials added during May, 10,000 units

30,000

Conversion costs during May

31,000

Goods finished during May, 11,500 units

May 31 work in process, 1,500 units, 50% completed

A ll direct materials are placed in process at the beginning of the process, and the first-in, first-out method is used to cost inventories. The materials cost per equivalent unit for May is a. $3.00 b. $3.80 c. $2.92 d. $2.31 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Materials Cost per Equivalent Unit = $30,000/10,000 = $3.00 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 88. Department E had 4,000 units in Work in Process that were 40% completed at the beginning of the period at a cost of $12,500. During the period, 14,000 units of direct materials were added at a cost of $28,700 and 15,000 units were completed. At the end of the period, 3,000 units were 75% completed. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710. The number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories was a. 15,650 b. 14,850 c. 14,150 d. 14,650 ANSWER:

RATIONALE:

Number of Equivalent Units for Conversion Costs during Period = (4,000 × 60%) + (15,000 – 4,000) + (3,000 × 75%) = 15,650 units

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 89. Department A had 1,000 units in Work in Process that were 60% completed at the beginning of the period at a cost of $7,000. During the period, 4,000 units of direct materials were added at a cost of $8,200 and 4,500 units were completed. At the end of the period, 500 units were 40% completed. All materials are added at the beginning of the process. Direct labor was $28,700, and factory overhead was $4,510. The cost of the 500 units in process at the end of the period if the first-in, first-out method is used to cost inventories was a. $3,240 b. $5,175 c. $2,569 d. $2,645 ANSWER: RATIONALE:

d Number of Equivalent Units for Conversion Costs during Period = (1,000 × 40%) + (4,500 – 1,000) + (500 × 40%) = 4,100 units Direct Materials Cost in Work in Process Inventory = 500 × $2.05 = $1,025 Total Conversion Cost in Work in Process Inventory = ($33,210/4,100) × (500 × 40%) = $1,620 Total Cost of Departmental Work in Process Inventory at End of Period = $1,025 + $1,620 = $2,645

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 90. In the manufacture of 8,000 units of a product, direct materials cost incurred was $154,600, direct labor cost incurred was $84,000, and applied factory overhead was $45,500. What is the total conversion cost? a. $129,500 b. $154,600 c. $284,100 d. $238,600 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Total Conversion Cost = $84,000 + $45,500 = $129,500 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 91. Department S had 500 units 60% completed in process at the beginning of the period, 9,000 units completed during the period, and 600 units 30% completed at the end of the period. What was the number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories? Assume the completion percentage applies to both direct materials and conversion cost. a. 8,880 b. 9,300 c. 8,700 d. 9,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Equivalent Units = (500 × 40%) + (9,000 – 500) + (600 × 30%) = 8,880 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 92. Department K had 3,000 units 45% completed in process at the beginning of the period, 17,000 units completed during the period, and 1,200 units 40% completed at the end of the period. What was the number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories? Assume the completion percentage applies to both direct materials and conversion cost. a. 18,350 b. 16,310 c. 15,650 d. 16,130 ANSWER: RATIONALE:

d Equivalent Units = (3,000 × 55%) + (17,000 – 3,000) + (1,200 × 40%) = 16,130 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Department A to answer the questions that follow. Department A had 5,000 units in Work in Process that were 60% completed as to labor and overhead at the beginning of the period. 34,000 units of direct materials were added during the period, 31,000 units were completed during the period, and 8,000 units were 80% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories. 93. The number of equivalent units of production for conversion costs for the period was a. 34,400 b. 34,200 c. 32,400 d. 34,000 ANSWER: RATIONALE:

a Equivalent Units = (5,000 × 40%) + (31,000 – 5,000) + (8,000 × 80%) = 34,400 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department A LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 94. The number of equivalent units of production for material costs for the period was a. 39,000 b. 29,800 c. 29,000 d. 32,000 ANSWER: RATIONALE:

a Equivalent Units = Number of Units of Direct Materials Added during Period = 39,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department A LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about the Finishing Department to answer the questions that follow. The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1 (30% completed) Completed units during June Ending inventory (60% complete)

4,000 units 65,000 units 7,000 units

95. What is the number of conversion equivalent units of production in the June 30 Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories? a. 68,000 units b. 70,400 units c. 66,200 units d. 4,200 units ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Equivalent Units = 7,000 × 60% = 4,200 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finishing Department LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 96. What is the number of material equivalent units of production in the June 30, Finishing Department inventory, assuming that the first-in, first-out method is used to cost inventories and materials were added at the beginning of the process? a. 7,000 units b. 68,000 units c. 72,000 units d. 76,000 units ANSWER: RATIONALE:

a Equivalent Units = Number of Units of Direct Materials in Ending Inventory = 7,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finishing Department LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 97. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 60% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed

$ 7,200 6,000 25,000 35,750 0 0

All direct materials are added at the beginning of the process, and the first-in, first-out method is used to cost inventories. The materials cost per equivalent unit for April is a. $2.48 b. $2.08 c. $2.50 d. $5.25 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Materials Cost per Equivalent Unit = $25,000/10,000 = $2.50 per unit 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 98. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 40% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed

$ 7,200 6,000 25,000 30,800 0 0

All direct materials are added at the beginning of the process, and the first-in, first-out method is used to cost inventories. The conversion cost per equivalent unit for April is a. $2.48 b. $2.75 c. $2.50 d. $5.25 ANSWER: RATIONALE:

b Equivalent Units = (3,000 × 60%) + (12,000 – 3,000) + (1,000 × 40%) = 11,200 units Conversion Cost per Equivalent Unit = $30,800/11,200 = $2.75 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Department B to answer the questions that follow. Department B had 3,000 units in Work in Process that were 25% completed at the beginning of the period at a cost of $12,500. 13,700 units of direct materials were added during the period at a cost of $28,700. 15,000 units were completed during the period, and 1,700 units were 95% completed at the end of the period. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710. 99. The number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories was a. 14,365 b. 13,615 c. 12,000 d. 15,865 ANSWER: RATIONALE:

d Equivalent Units = (3,000 × 75%) + (15,000 – 3,000) + (1,700 × 95%) = 15,865 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department B LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 100. The number of equivalent units of production for the period for materials if the first-in, first-out method is used to cost inventories was a. 16,700 b. 12,000 c. 1,700 d. 13,700 ANSWER: RATIONALE:

d Equivalent Units = Number of Units of Direct Materials Added during Period = 13,700 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department B LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Super Co. to answer the questions that follow. The following unit data were assembled for the assembly process of Super Co. for the month of April. Direct materials are added at the beginning of the process. Conversion costs are added uniformly over the production process. The company uses the FIFO method. Units Beginning work in process (60% completed)

5,000

Units started in April

48,000

Ending work in process (30% completed)

4,000

101. The number of equivalent units produced with respect to conversion costs is a. 50,200 b. 48,000 c. 53,000 d. 46,200 ANSWER: RATIONALE:

d Equivalent Units = (5,000 × 40%) + (48,000 – 5,000) + (4,000 × 30%) = 46,200 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Super Co. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 102. The number of equivalent units produced with respect to direct materials costs is a. 48,000 b. 49,000 c. 43,000 d. 53,000 ANSWER: RATIONALE:

a Equivalent Units = Number of Units of Direct Materials Added during Period = 48,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Super Co. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Carmelita Inc. to answer the questions that follow. Carmelita Inc. has the following information available:

Direct materials Conversion costs

Costs from Beginning Inventory $2,000 6,200

Costs from Current Period $ 22,252 150,536

103. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO process cost method. The equivalent units of production for direct materials and conversion costs, respectively, were a. 5,340 for direct materials and 4,902 for conversion costs b. 4,840 for direct materials and 4,802 for conversion costs c. 4,602 for direct materials and 4,802 for conversion costs d. 4,902 for direct materials and 4,802 for conversion costs ANSWER: RATIONALE:

b Equivalent Units for Direct Materials = Number of Units of Direct Materials Added during Period = 4,500 + 340 = 4,840 units Equivalent Units for Conversion Costs = (500 × 40%) + 4,500 + (340 × 30%) = 4,802 units

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carmelita, Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 104. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO process cost method. The cost of completing a unit (rounded to the nearest cent) during the current period was a. $36.19 b. $34.88 c. $35.95 d. $35.89 ANSWER: RATIONALE:

c Equivalent Units for Direct Materials = Number of Units of Direct Materials Added during Period = 4,500 + 340 = 4,840 units Equivalent Units for Conversion Costs = (500 × 40%) + 4,500 + (340 × 30%) = 4,802 units Cost of Completing a Unit during Current Period = ($22,252/4,840) + ($150,536/4,802) = $35.95 per unit POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carmelita, Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 4:29 PM

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Chapter 20 - Process Cost Systems 105. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. Assume that the company uses the FIFO process cost method. Round cost per unit figures to the nearest cent when calculating total costs. The total costs transferred into Finished Goods for units started and completed were a. $161,775 b. $156,960 c. $162,855 d. $161,505 ANSWER: RATIONALE:

a Equivalent Units for Direct Materials = Number of Units of Direct Materials Added during Period = 4,500 + 340 = 4,840 units Equivalent Units for Conversion Costs = (500 × 40%) + 4,500 + (340 × 30%) = 4,802 units Cost of Completing a Unit during Current Period = ($22,252/4,840) + ($150,536/4,802) = $35.95 per unit Total Costs Transferred into Finished Goods for Units Started and Completed = $35.95 × 4,500 = $161,775

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carmelita, Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 4:30 PM

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Chapter 20 - Process Cost Systems 106. Equivalent production units are generally determined for a. direct materials and conversion costs b. direct materials only c. conversion costs only d. direct materials and direct labor costs only ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 107. The portion of whole units that were completed with respect to either materials or conversion costs within a given accounting period is the definition of a. units started and completed b. equivalent units c. conversion costs d. ending work in process ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 108. Which of the following is not included in conversion costs? a. direct labor b. factory overhead c. indirect labor d. direct materials ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 109. A form prepared periodically for each processing department summarizing the units for which the department is accountable and the units to be assigned costs and the costs charged to the department and the allocation of these costs is termed a a. factory overhead production report b. manufacturing cost report c. process cost report d. cost of production report ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems Use this information about Department G to answer the questions that follow. Department G had 3,600 units, 40% completed at the beginning of the period, 12,000 units were completed during the period, 2,000 units were 20% completed at the end of the period, and the following manufacturing costs were debited to the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 at $9.8365) Direct labor Factory overhead

$ 60,000 102,300 79,800 25,200

110. Assuming that all direct materials are placed in process at the beginning of production and that the first-in, first-out method of inventory costing is used, determine the equivalent units for direct materials and conversion costs, respectively. a. 14,000 and 12,160 b. 10,400 and 10,960 c. 14,000 and 13,600 d. 10,400 and 10,240 ANSWER: RATIONALE:

b Equivalent Units for Direct Materials = (12,000 – 3,600) + 2,000 = 10,400 units Equivalent Units for Conversion Costs = (3,600 × 60%) + (12,000 – 3,600) + (2,000 × 20%) = 10,960 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department G LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 8:56 PM

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Chapter 20 - Process Cost Systems 111. Assuming that all direct materials are placed in process at the beginning of production and that the first-in, first-out method of inventory costing is used, determine the direct materials cost and conversion cost per unit (rounded to the nearest cent), respectively. a. $5.94 and $5.86 b. $5.94 and $6.38 c. $8.00 and $8.68 d. $9.84 and $9.58 ANSWER: RATIONALE:

d Equivalent Units for Direct Materials = (12,000 – 3,600) + 2,000 = 10,400 units Equivalent Units for Conversion Cost = (3,600 × 60%) + (12,000 – 3,600) + (2,000 × 20%) = 10,960 units Materials Cost per Equivalent Unit = $102,300/10,400 = $9.84 per unit. Conversion Cost per Equivalent Unit = $105,000/10,960 = $9.58 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department G LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 8:59 PM

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Chapter 20 - Process Cost Systems Use this information about Department W to answer the questions that follow. Department W had 2,400 units, one-third completed at the beginning of the period. 16,000 units were transferred to Department X from Department W during the period, and 1,800 units were one-half completed at the end of the period. Assume the completion ratios apply to direct materials and conversion costs. 112. What is the total number of units to be assigned costs on the cost of production report for Department W? a. 12,000 units b. 13,600 units c. 18,500 units d. 17,800 units ANSWER: RATIONALE:

d Number of Units to Be Assigned Costs = 2,400 units + (16,000 – 2,400) units + 1,800 units = 17,800 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department W had 2,400 units, one-third completed LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 113. Determine the equivalent units of production used to compute the unit conversion cost on the cost of production report for Department W. Assume the company uses FIFO. a. 16,100 units b. 13,600 units c. 15,000 units d. 18,500 units ANSWER: RATIONALE:

a Equivalent Units for Conversion Costs = (2,400 × 66.67%) + (16,000 – 2,400) + (1,800 × 50%) = 16,100 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department W had 2,400 units, one-third completed LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:03 PM

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Chapter 20 - Process Cost Systems 114. Carolwood Company manufactures widgets and uses process costing. The status of the beginning and ending inventory is: Beginning inventory Ending inventory

30% of the manufacturing process is complete 55% of the manufacturing process is complete

Direct materials are added to the manufacturing process in stages. None are added when production begins. Approximately half of the materials are added when the product is 25% complete. The other half is added when the product is 50% complete. What percentage complete are beginning inventory and ending inventory with respect to direct materials (DM) and conversion costs (CC)? a. beg. inventory: DM—50%, CC—30% end. inventory: DM—100%, CC—55% b. beg. inventory: DM—50%, CC—30% end. inventory: DM—55%, CC—55% c. beg. inventory: DM—30%, CC—30% end. inventory: DM—55%, CC—55% d. beg. inventory: DM—50%, CC—70% end. inventory: DM—100%, CC—45% ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:05 PM

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Chapter 20 - Process Cost Systems 115. Blue Lake Water Company has two departments, Purifying and Bottling. The Bottling Department received 76,000 liters from the Purifying Department. During the period, the Bottling Department completed 74,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process was 5,000 liters. How many liters were started and completed during the period? a. 71,000 b. 69,000 c. 73,000 d. 79,000 ANSWER: RATIONALE:

a Liters Started and Completed during Period = 74,000 units – 3,000 units = 71,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:05 PM

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Chapter 20 - Process Cost Systems Use this information about Penny, Inc. to answer the questions that follow. Penny, Inc. employs a process costing system. Direct materials are added at the beginning of the process. Here is information about the July activities: On July 1: Beginning inventories Direct materials cost Conversion costs During July: Number of units started Direct materials added Conversion costs added On July 31: Ending inventories

850 units, 60% complete $5,000 $4,000

15,000 $155,000 $83,520

1,600 units, 40% complete

116. Using the FIFO method, the number of units started and completed in July was a. 14,250 b. 15,000 c. 13,400 d. 15,740 ANSWER: RATIONALE: POINTS: DIFFICULTY:

c Number of Units Started and Completed in July = 15,000 – 1,600 = 13,400 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Penny Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 117. Using the FIFO method, the number of equivalent units of conversion costs was a. 14,400 b. 14,380 c. 14,550 d. 15,850 ANSWER: RATIONALE:

b Equivalent Units for Conversion Costs = (850 × 40%) + (15,000 – 1,600) + (1,600 × 40%) = 14,380 units

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Penny Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 118. Using the FIFO method and rounding cost per unit to the nearest whole dollar, the cost of goods completed and transferred out during July was a. $227,270 b. $225,060 c. $236,905 d. $228,200 ANSWER: RATIONALE:

a Inventory in Process, July 1—Balance + Cost of Completion of Beginning Inventory + Cost of Units Started and Completed in July = $5,000 + {$4,000 + [($83,520/14,380 units) × 340 units]} + [($155,000/15,000 units) × 13,400 units] + [($83,520/14,380) × 13,400 units] = $227,270 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Penny Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:09 PM

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Chapter 20 - Process Cost Systems 119. Using the FIFO method, the cost per equivalent unit for materials used during July was a. $10.78 b. $10.33 c. $9.78 d. $10.65 ANSWER: RATIONALE:

b Cost per Equivalent Unit for Materials Used during July = $155,000/15,000 = $10.33 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Penny Inc. LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Department J to answer the questions that follow. Department J had no work in process at the beginning of the period. 18,000 units were completed during the period, and 2,000 units were 30% completed at the end of the period. The following manufacturing costs were debited to the departmental work in process account during the period (assume the company uses FIFO and rounds cost per unit to two decimal places): Direct materials (20,000 at $5) Direct labor Factory overhead

$100,000 142,300 57,200

120. Assuming that all direct materials are placed in process at the beginning of production, what is the total cost of the 18,000 units completed during the period? a. $90,000 b. $193,140 c. $16,438 d. $283,140 ANSWER: RATIONALE:

d Direct Materials Cost = 18,000 units × $5 = $90,000 Conversion Cost = [($142,300 + $57,200)/18,600] × 18,000 units = $193,140 Total Cost = $90,000 + $193,140 = $283,140 POINTS: 1 DIFFICULTY: Bloom's: Applying Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department J LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 121. Assuming that all direct materials are placed in process at the beginning of production, what is the total cost of the departmental work in process inventory at the end of the period? a. $90,000 b. $283,140 c. $199,500 d. $16,438 ANSWER: RATIONALE:

d Total Cost of Departmental Work in Process Inventory at End of Period = Direct Materials Cost + Conversion Costs = ($5 × 2,000) + [($199,500/18,600) × 600] = $10,000 + $6,438 = $16,438 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department J LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Mocha Company to answer the questions that follow. Mocha Company manufactures a single product by a continuous process, involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $55,000, $65,000, and $80,000, respectively. In addition, work in process at the beginning of the period for Department 1 totaled $75,000, and work in process at the end of the period totaled $60,000. 122. The journal entry to record the flow of costs into Department 1 during the period for direct materials is a. Work in Process—Department 1 100,000 Materials 100,000 b. Work in Process—Department 1 55,000 Materials 55,000 c. Materials 100,000 Work in Process—Department 1 100,000 d. Materials 55,000 Work in Process—Department 1 55,000 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mocha Company LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 123. The journal entry to record the flow of costs into Department 2 during the period for direct materials is a. Work in Process—Department 2 100,000 Materials 100,000 b. Work in Process—Department 2 55,000 Materials 55,000 c. Work in Process—Department 2 150,000 Materials 150,000 d. Materials 55,000 Work in Process—Department 2 55,000 ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mocha Company LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 124. The journal entry to record the flow of costs into Department 1 for direct labor is a. Work in Process—Department 1 65,000 Wages Payable 65,000 b. Wages Payable 125,000 Work in Process—Department 1 125,000 c. Work in Process—Department 1 125,000 Wages Payable 125,000 d. Wages Payable 65,000 Work in Process—Department 1 65,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mocha Company LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 125. The journal entry to record the flow of costs into Department 2 for direct labor is a. Work in Process—Department 2 65,000 Wages Payable 65,000 b. Wages Payable 65,000 Work in Process—Department 2 65,000 c. Work in Process—Department 2 125,000 Wages Payable 125,000 d. Work in Process—Department 2 185,000 Wages Payable 185,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 126. The journal entry to record the flow of costs into Department 1 during the period for applied overhead is a. Factory Overhead—Department 1 150,000 Work in Process—Department 1 150,000 b. Work in Process—Department 1 125,000 Factory Overhead—Department 1 125,000 c. Work in Process—Department 1 80,000 Factory Overhead—Department 1 80,000 d. Work in Process—Department 1 150,000 Factory Overhead—Department 1 150,000 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mocha Company LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 127. The journal entry to record the flow of costs into Department 2 for applied overhead is a. Factory Overhead—Department 2 80,000 Work in Process—Department 2 80,000 b. Work in Process—Department 2 230,000 Factory Overhead—Department 2 230,000 c. Work in Process—Department 2 80,000 Factory Overhead—Department 2 80,000 d. Work in Process—Department 2 150,000 Factory Overhead—Department 2 150,000 ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 128. The journal entry to record the flow of costs from Department 1 into Department 2 is a. Work in Process—Department 2 390,000 Work in Process—Department 1 390,000 b. Work in Process—Department 2 330,000 Work in Process—Department 1 330,000 c. Work in Process—Department 2 215,000 Work in Process—Department 1 215,000 d. Work in Process—Department 2 375,000 Work in Process—Department 1 375,000 ANSWER: RATIONALE:

a Amount of Transfer from Department 1 to Department 2 = $75,000 + $100,000 + $125,000 + $150,000 – $60,000 = $390,000 The journal entry to record the flow of costs from Department 1 into Department 2 is to debit Work in Process—Department 2 for $390,000 and to credit Work in Process—Department 1 for $390,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mocha Company LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 129. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. Work in process at the beginning of the period for Department 1 was $75,000, and work in process at the end of the period totaled $60,000. The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 2 totaled $75,000, and work in process at the end of the period totaled $60,000. The journal entry to record the flow of costs into Department 3 during the period is a. Work in Process—Department 3 585,000 Work in Process—Department 2 585,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 c. Work in Process—Department 3 555,000 Work in Process—Department 2 555,000 d. Work in Process—Department 3 165,000 Work in Process—Department 2 165,000 ANSWER: RATIONALE:

a Amount of Transfer from Department 2 to Department 3 = ($75,000 + $50,000 + $60,000 + $70,000 – $60,000) + ($75,000 + $100,000 + $125,000 + $150,000 – $60,000) = $585,000 The journal entry to record the flow of costs from Department 2 into Department 3 is to debit Work in Process—Department 3 for $585,000 and to credit Work in Process—Department 2 for $585,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:27 PM

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Chapter 20 - Process Cost Systems 130. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. Department 2 has transferred in costs of $390,000 for the current period. In addition, work in process at the beginning of the period for Department 2 totaled $75,000 and work in process at the end of the period totaled $90,000. The journal entry to record the flow of costs into Department 3 during the period is a. Work in Process—Department 3 375,000 Work in Process—Department 2 375,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 c. Work in Process—Department 3 490,000 Work in Process—Department 2 490,000 d. Work in Process—Department 3 555,000 Work in Process—Department 2 555,000 ANSWER: RATIONALE:

d Amount of Flow of Cost into Department 3 during Period = $390,000 + $50,000 + $60,000 + $70,000 + $75,000 – $90,000 = $555,000 The journal entry to record the flow of costs from Department 2 into Department 3 is to debit Work in Process—Department 3 for $555,000 and to credit Work in Process—Department 2 for $555,000. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:00 AM

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Chapter 20 - Process Cost Systems 131. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 3 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 3 totaled $75,000, and work in process at the end of the period totaled $60,000. The journal entry to record the flow of costs into Department 3 during the period for direct materials is a. Work in Process—Department 3 100,000 Materials 100,000 b. Work in Process—Department 3 125,000 Materials 125,000 c. Work in Process—Department 3 50,000 Materials 50,000 d. Work in Process—Department 3 70,000 Materials 70,000 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:29 PM

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Chapter 20 - Process Cost Systems 132. Which of the following is not a use of the cost of production report? a. to help managers control operations b. to help managers isolate problems c. to project production d. to help managers improve operations ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-04 - 20-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 133. Which of the following measures would not help managers to control and improve operations? a. units produced per time period b. cost trends of a product c. yield trends d. commissions paid per time period ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-04 - 20-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 134. Lean manufacturing is a business philosophy that focuses on reducing time and cost and eliminating poor quality. This is accomplished in manufacturing and nonmanufacturing processes by a. moving a product from process to process as each function is completed b. combining processing functions into work centers and cross-training workers to perform more than one function c. having production supervisors attempt to enter enough materials into manufacturing to keep all manufacturing departments operating d. having workers typically perform one function on a continuous basis ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 9:33 PM 135. When a firm adopts lean manufacturing, a. new, more efficient machinery and equipment must be purchased and installed in the original layout b. machinery and equipment are moved into small autonomous production lines called manufacturing cells c. new machinery and equipment must be purchased from franchised JIT dealers d. employees are retrained on different equipment but the plant layout generally stays unchanged ANSWER: POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 136. Which of the following best describes the effect on direct labor when management adopts a lean production process? a. Workers typically perform one function. b. The environment becomes more labor intensive. c. Each employee runs a single machine. d. Workers are often cross-trained to perform more than one function. ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:12 PM 137. According to lean manufacturing, a. finished goods should always be available in case a customer wants something b. employees should be expert at one function rather than be cross-trained for multiple functions c. movement of the product and material is reduced d. the product moves from process to process until completion ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:14 PM

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Chapter 20 - Process Cost Systems 138. Lean manufacturing attempts to significantly reduce a. profits b. inventory needed to produce products c. waste and simplify the production process d. processing time ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:15 PM

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Chapter 20 - Process Cost Systems Use this information about the Assembly Department to answer the questions that follow. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 80% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 11,500 units April 30 work in process, 1,500 units, 60% completed

$ 7,500 6,000 29,000 35,000 — —

All direct materials are placed in process at the beginning of the process, and the average cost method is used to cost inventories. 139. The materials cost per equivalent unit (rounded to the nearest cent) for April is a. $2.60 b. $2.81 c. $3.02 d. $2.26 ANSWER: RATIONALE:

b Equivalent Units = 11,500 units + 1,500 units = 13,000 units Materials Cost per Equivalent Unit = ($7,500 + $29,000)/13,000 = $2.81 per equivalent unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Assembly Department LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:15 PM

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Chapter 20 - Process Cost Systems 140. The conversion cost per equivalent unit (rounded to the nearest cent) for April is a. $2.70 b. $2.53 c. $3.31 d. $5.60 ANSWER: RATIONALE:

c Equivalent Units = 11,500 units + (1,500 × 60%) units = 12,400 units Conversion Cost per Equivalent Unit = ($6,000 + $35,000)/12,400 = $3.31 per equivalent unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Assembly Department LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:21 PM

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Chapter 20 - Process Cost Systems Use this information about Department E to answer the questions that follow. Department E had 4,000 units in Work in Process that were 40% completed at the beginning of the period at a cost of $12,500. 14,000 units of direct materials were added during the period at a cost of $28,700. 15,000 units were completed during the period, and 3,000 units were 75% completed at the end of the period. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710. 141. The number of equivalent units of production for the period for conversion if the average cost method is used to cost inventories was a. 15,650 b. 14,850 c. 18,000 d. 17,250 ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Equivalent Units = 15,000 units + (3,000 × 75%) units = 17,250 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department E LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 142. The number of equivalent units of production for the period for materials if the average cost method is used to cost inventories was a. 15,650 b. 18,000 c. 17,250 d. 17,700 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Equivalent Units = 15,000 units + 3,000 units = 18,000 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Department E LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems Use this information about Department F to answer the questions that follow. Department F had 4,000 units in Work in Process that were 40% completed at the beginning of the period at a cost of $12,500. Of the $12,500, $8,000 was for materials and $4,500 was for conversion costs. 14,000 units of direct materials were added during the period at a cost of $28,700. 15,000 units were completed during the period, and 3,000 units were 75% completed at the end of the period. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710.

143. If the average cost method is used, the materials cost per unit (rounded to the nearest cent) would be a. $2.04 b. $1.59 c. $1.91 d. $2.00 ANSWER: RATIONALE:

a Equivalent Units = 15,000 units + 3,000 units = 18,000 units Materials Cost per Equivalent Unit = ($8,000 + $28,700)/18,000 = $2.04 per equivalent unit POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dept E LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:25 PM

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Chapter 20 - Process Cost Systems 144. If the average cost method is used, the conversion cost per unit (rounded to the nearest cent) would be a. $3.71 b. $2.84 c. $2.97 d. $3.23 ANSWER: RATIONALE:

d Equivalent Units = 15,000 units + (3,000 × 75%) units = 17,250 units Conversion Cost per Equivalent Unit = ($4,500 + $32,450 + $18,710)/17,250 = $3.23 per equivalent unit POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dept E LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:26 PM

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Chapter 20 - Process Cost Systems Matching Match each business that follows to the type of costing system (a or b) it would typically use. a. Job order costing b. Process costing DIFFICULTY:

Easy Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 145. Movie studio ANSWER: a POINTS: 1 146. Gasoline refinery ANSWER: b POINTS: 1 147. Home construction ANSWER: a POINTS: 1 148. Paper manufacturer ANSWER: b POINTS: 1 149. Flour mill ANSWER: b POINTS: 1 Match each phrase that follows with the term (a–h) it describes. a. Direct labor and factory overhead b. Direct labor and direct materials c. Transferred-in costs d. Equivalent units e. Process costing f. Job order costing g. First-in, first-out method Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems h. Cost of production report DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:29 PM 150. A process costing method that costs each period’s equivalent units of work with that period’s costs per equivalent unit ANSWER: g POINTS: 1 151. Measure of the work done during a production period, expressed in terms of fully complete units of output ANSWER: d POINTS: 1 152. Conversion costs ANSWER: a POINTS: 1 153. Summary of the activity in a processing department for a specific period ANSWER: h POINTS: 1 154. Costing system used by a company producing computer chips ANSWER: e POINTS: 1 155. Prime costs ANSWER: b POINTS: 1 156. Costs incurred in a previous process that are carried forward as part of the product’s cost when it moves to the next department ANSWER: c POINTS: 1 157. Costing system used by a company producing custom window treatments ANSWER: f POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems Match each phrase that follows with the term (a–e) it describes. a. Cost of production report b. Equivalent units of production c. Manufacturing cells d. Yield e. Lean manufacturing DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCT.WARD.18.20-04 - 20-04 ACCT.WARD.18.20-05 - 20-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 10:34 PM 158. Measures the quantity of output of production relative to the inputs ANSWER: d POINTS: 1 159. Provides information for controlling and improving operations ANSWER: a POINTS: 1 160. Focuses on reducing time, cost, and poor quality within the process ANSWER: e POINTS: 1 161. The portion of whole units that are complete with respect to materials or conversion costs ANSWER: b POINTS: 1 162. Work centers for processing in a lean production process ANSWER: c POINTS: 1

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Chapter 20 - Process Cost Systems Subjective Short Answer 163. Job order manufacturing and process manufacturing are two major costing systems used in manufacturing. Briefly contrast the characteristics of these two systems. ANSWER:

Job Order System Custom orders Heterogeneous product Low production volume Low to medium standardization

Process System Repetitive production Homogeneous product High production volume High standardization

POINTS: DIFFICULTY:

1 Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 164. Explain the concept of equivalent units. Give an example to validate your explanation. ANSWER:

Equivalent units are a measure of the amount of work done during a production period, expressed in terms of fully completed units of output. If 40,000 units were started and completed, then the equivalent units would equal 40,000 units. However, if those same 40,000 units were started and only 50% complete, then the equivalent units would be 40,000 × 50% = 20,000 units. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM

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Chapter 20 - Process Cost Systems 165. Which of the following businesses would normally use job order costing systems, and which would normally use process costing systems? Tax consultant Paint manufacturer Nail manufacturer Videographer Lotions and cosmetics manufacturer Web design Tax consultant Job order Paint manufacturer Process Nail manufacturer Process Videographer Job order Lotions and cosmetics manufacturer Process Web designing Job order POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-01 - 20-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:39 AM ANSWER:

166. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 67,000 liters from the Purifying Department. During the period, the Bottling Department completed 65,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process was 5,000 liters. How many liters were started and completed during the period? ANSWER: POINTS: DIFFICULTY:

62,000 liters started and completed (65,000 completed – 3,000 beginning WIP) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:39 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems 167. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 58,000 liters from the Purifying Department. During the period, the Bottling Department completed 56,000 liters, including 4,000 liters of work in process at the beginning of the period. The ending work in process was 6,000 liters. How many liters were started and completed during the period? ANSWER: POINTS: DIFFICULTY:

52,000 liters started and completed (56,000 completed – 4,000 beginning WIP) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:39 AM 168. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 3,000 liters in beginning work in process inventory (30% complete). During the period, 71,000 liters were completed. The ending work in process was 5,000 liters (70% completed). What is the total equivalent units for direct materials (using the FIFO method) if materials were added at the beginning of the process? Whole Units

ANSWER: Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs

3,000 ×

Equivalent Units 0%

68,000 × 100%

68,000

71,000 5,000 × 100% 76,000

68,000 5,000 73,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:40 AM

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Chapter 20 - Process Cost Systems 169. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 8,000 liters in beginning work in process inventory (60% complete). During the period 70,000 liters were completed. The ending work in process was 3,000 liters (60% completed). What are the total equivalent units for direct materials under the FIFO method if materials were added at the beginning of the process? Whole Units

ANSWER:

Equivalent Units

Inventory in process, beginning of period

8,000 ×

Started and completed during the period

62,000 × 100%

62,000

Transferred out of Bottling (completed)

70,000

62,000

Inventory in process, end of period

3,000 × 100%

3,000

Total units to be assigned costs

73,000

65,000

POINTS: DIFFICULTY:

Page 109

Chapter 20 - Process Cost Systems 170. The Bottling Department of Mountain Springs Water Company had 5,000 liters in beginning work in process inventory (20% complete). During the period, 58,000 liters were completed. The ending work in process inventory was 3,000 liters (90% complete). What are the equivalent units for conversion costs under the FIFO method? Whole Units

ANSWER: Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs

Equivalent Units

5,000 × 80%

4,000

53,000 × 100%

53,000

58,000

57,000

3,000 × 90%

2,700

61,000

59,700

POINTS: DIFFICULTY:

Page 110

Chapter 20 - Process Cost Systems 171. The Bottling Department of Mountain Springs Water Company had 4,000 liters in beginning work in process inventory (40% complete). During the period, 66,000 liters were completed. The ending work in process inventory was 3,000 liters (70% complete). Using the FIFO method, what are the equivalent units for conversion costs? Whole Units

ANSWER: Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs

Equivalent Units

4,000 × 60%

2,400

62,000 × 100%

62,000

66,000

64,400

3,000 × 70%

2,100

69,000

66,500

POINTS: DIFFICULTY:

Page 111

Chapter 20 - Process Cost Systems 172. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $27,225. The conversion cost for the period in the Bottling Department is $7,596. The total equivalent units for direct materials and conversion are 60,500 and 63,300, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to nearest cent. ANSWER:

Cost per Equivalent Unit of Materials = $27,225/60,500 liters = $0.45

Cost per Equivalent Unit of Conversion = $7,596/63,300 liters = $0.12 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:42 AM 173. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $28,072. The conversion cost for the period in the Bottling Department is $10,275. The total equivalent units for direct materials and conversion are 63,800 and 68,500, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to nearest cent. ANSWER:

Cost per Equivalent Unit of Materials = $28,072/63,800 liters = $0.44

Cost per Equivalent Unit of Conversion = $10,275/68,500 liters = $0.15 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:43 AM

Page 112

Chapter 20 - Process Cost Systems 174. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Mountain Springs Water Company is $0.45 and $0.12, respectively. The equivalent units to be assigned costs are as follows: Direct Materials Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units and costs to be assigned

0 57,000 57,000 3,500 60,500

Conversion 3,500 57,000 60,500 1,800 62,300

The beginning work in process inventory had a cost of $2,200. Determine the cost of completed and transferred out production and the ending work in process inventory. Direct Materials

ANSWER:

Conversion

Inventory in process, beginning balance

Total

$ 2,200

Inventory in process, beginning of period

3,500 × $0.12

420

Started and completed during the period

57,000 × $0.45

57,000 × $0.12

32,490

Transferred out of Bottling (completed) Inventory in process, end of period

$35,110 3,500 × $0.45

Total costs assigned by the Bottling Dept. Completed and transferred out production Inventory in process, ending POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:02 AM

1,800 × $0.12

1,791 $36,901 $35,110 $1,791

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Chapter 20 - Process Cost Systems 175. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Beverages on Jolt Company is $0.47 and $0.15, respectively. The equivalent units to be assigned costs are as follows: Direct Materials Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs

0 52,000 52,000 3,500 55,500

Conversion 3,000 52,000 55,000 2,100 57,100

The beginning work in process inventory had a cost of $3,500. Determine the cost of completed and transferred out production and the ending work in process inventory. Direct Materials Conversion

ANSWER:

Inventory in process, balance 3,000 × Inventory in process, beginning of 0 $0.15 period Started and completed during the 52,000 × 52,000 × $0.47 $0.15 period Transferred out of Bottling (completed) 3,500 × 2,100 × Inventory in process, end of $0.47 $0.15 period Total costs assigned by the Bottling Department Completed and transferred out production Inventory in process, ending

Total $ 3,500 450 32,240 $36,190 1,960 $38,150 $36,190 $1,960

POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 176. Alexandra Company’s Molding Department opened on July 1. During July, 70,000 units were completed and transferred out to the next department. On July 31, the 10,000 units that remained in inventory were 40% complete with respect to conversion costs and 100% complete with respect to materials. How many equivalent units of work did the Molding Department complete during July for materials and conversion costs? ANSWER:

Materials: 70,000 + (10,000 × 100%) = 80,000

Conversion costs: 70,000 + (10,000 × 40%) = 74,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:07 AM

Page 115

Chapter 20 - Process Cost Systems 177. Kramer Company started its production operations on August 1. During August, the Printing Department completed 17,600 units. There were 4,400 units in ending inventory that were 80% complete with respect to materials and 10% complete with respect to conversion costs. During August, the department had accumulated materials costs of $45,408 and conversion costs of $76,670. Required: (a) Calculate the cost of the goods transferred out. (b) What is the value of the ending inventory? ANSWER:

Cost per Equivalent Unit for Materials = $45,408/[17,600 + (80% × 4,400)] = $2.15 Cost per Equivalent Unit for Conversion Costs = $76,670/[17,600 + (10% × 4,400)] = $4.25 (a) ($2.15 + $4.25) × 17,600 = $112,640

(b) ($2.15 × 80% × 4,400) + ($4.25 × 10% × 4,400) = $9,438 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 7:52 AM 178. The inventory at June 1 and costs charged to Work in Process—Department 60 during June are as follows: 3,800 units, 60% completed Direct materials, 32,000 units Direct labor Factory overhead Total cost to be accounted for

$ 60,400 378,000 274,000 168,000 $880,400

During June, 32,000 units were placed into production and 31,200 units were completed, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units which were 85% completed. Inventories are costed by the first-in, first-out method and all materials are added at the beginning of the process. Determine the following (round unit cost data to four decimal places to minimize rounding differences): (a) Equivalent units of production for conversion cost (b) Conversion cost per equivalent unit (c)

Total and unit cost of finished goods started in prior period and completed in the current period

(d)

Total and unit cost of finished goods started and completed in the current period

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Chapter 20 - Process Cost Systems (e)

Total cost of work in process inventory, June 30

ANSWER:

(a) Equivalent units of production: To process units in inventory on June 1: 3,800 × 40%

1,520

To process units started and completed in June: 31,200 – 3,800

27,400

To process units in inventory on June 30: 4,600 × 85% Equivalent units of production for conversion cost

3,910 32,830

(b) Conversion cost per equivalent unit of production: Conversion costs: Direct labor

$274,000

Factory overhead

168,000 $442,000

Unit conversion cost, $442,000 ÷ 32,830

$13.4633

(c) Cost of finished goods started in the prior period and completed in current period: $60,400 Work in process inventory on June 1 Conversion costs in current period: 3,800 × 40% = 1,520 units at $13.4633 Total cost

20,464 $80,864

Beginning inventory unit cost: $80,864 ÷ 3,800 (d) Cost of finished goods started and completed in current period: Direct materials: 27,400 units at $11.8125* Conversion costs: 27,400 units at $13.4633 Total cost Unit cost: $692,557 ÷ 27,400 *$378,000 ÷ 32,000 (e) Cost of work in process inventory at June 30: Direct materials: 4,600 units at $11.8125 Conversion costs: 3,910 units at $13.4633 Total cost Copyright Cengage Learning. Powered by Cognero.

$21.2800

$323,663 368,894 $692,557 $25.2758

$ 54,338 52,642 $106,980 Page 117

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Total cost accounted for: $80,864 + $692,557 + $106,980

$880,401

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:31 AM 179. Stevens Company's inventory on March 1 and the costs charged to Work in Process—Department B during March are as follows: Beginning work in process, 12,000 units, 60% completed From Department A, 55,000 units started this period Direct materials added Direct labor incurred Factory overhead incurred

$ 62,400 115,500 384,915 138,000

During March, all direct materials were transferred from Department A, the units in process at March 1 were completed, and of the 55,000 units entering the department, all were completed except 6,000 units that were 70% completed. Inventories are costed by the first-in, first-out method. Prepare a cost of production report for March. Round unit cost data to four decimal places and total cost to nearest cent. ANSWER: Stevens Company Cost of Production Report—Department B For the Month Ended March 31 Equivalent Units UNITS

Whole Direct Units Materials Conversion

Units charged to production: Inventory in process, March 1

12,000

Received from Dept. A

55,000

Total units accounted for by Dept. B

67,000

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Chapter 20 - Process Cost Systems

Units to be assigned costs: Inventory in process, March 1 (60% completed)

12,000

4,800

Started and completed in March

49,000

Transferred to finished goods in March

61,000

49,000

53,800

6,000

4,200

67,000

55,000

58,000

Inventory in process, March 31 (70% complete) Total units to be assigned costs

Costs

COSTS

Direct Materials Conversion

Total

Costs per equivalent unit: Total costs for March in Dept. B

$115,500

$522,915

Total equivalent units

÷ 55,000

÷ 58,000

Cost per equivalent unit

$ 2.1000

$ 9.0158

Costs charged to production: Inventory in process, March 1

$ 62,400

Costs incurred in March

638,415

Total costs accounted for by Dept. B

$700,815

Costs allocated to completed and partially completed units: $ 62,400

Inventory in process, March 1, balance $ To complete inventory in process, March 1 Started and completed in March

$ 43,276 0

102,900

441,774 544,674 $650,350

Transferred to finished goods in March Inventory in process, March 31 Total costs assigned by Dept. B Copyright Cengage Learning. Powered by Cognero.

43,276

12,600

37,866

50,466 $700,816

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Chapter 20 - Process Cost Systems POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:11 AM 180. Austin Co. manufactures a product called Aster in a three-process series. All materials are introduced at the beginning of the first process. Austin uses the first-in, first-out method of inventory costing. Unit and cost data for the first process (Department A) for the month of December follow:

Work in process inventory: December 1 December 31 Started in December: Direct materials cost Conversion cost Completed in December

Units

Completion

Cost

12,000 5,000 14,000

60% 40%

$140,400 ?

21,000

106,400 70,310 ?

Prepare Austin's Department A cost of production report for December. ANSWER: Austin Company Cost of Production Report—Department A For the Month Ended December 31 Equivalent Units

UNITS

Whole Units

Direct Conversion Materials

Units charged to production: Inventory in process, Dec. 1 Received from materials storeroom Total units accounted for by Dept. A Copyright Cengage Learning. Powered by Cognero.

12,000 14,000 26,000

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Chapter 20 - Process Cost Systems

Units to be assigned costs: Inventory in process, Dec. 1 (60% completed)

12,000

4,800

9,000

21,000

9,000

13,800

Inventory in process, Dec. 31 (40% complete)

5,000

2,000

Total units to be assigned costs

26,000

14,000

15,800

Started and completed in December Transferred to Dept. B in December

Costs COSTS

Direct Materials Conversion

Total

Costs per equivalent unit: Total costs for December in Dept. A

$106,400

$ 70,310

Total equivalent units

÷14,000

÷15,800

Cost per equivalent unit

7.60

4.45

Costs charged to production: Inventory in process, Dec. 1

$140,400

Costs incurred in December

176,710

Total costs accounted for by Dept. A

$317,110

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Chapter 20 - Process Cost Systems

Costs allocated to completed and partially completed units: $140,400

Inventory in process, Dec. 1, balance To complete inventory in process, Dec. 1 Started and completed in December

$21,360

21,360

68,400

40,050

108,450

Transferred to finished goods in December Inventory in process, Dec. 31

$270,210 38,000

Total costs assigned by Dept. A

8,900

46,900 $317,110

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:13 AM 181. Erin Company's inventory at December 1 and the costs charged to Work in Process—Department B during December are as follows: 1,200 units, 40% completed From Department A, 26,000 units Direct labor Factory overhead

$ 47,800 845,000 312,000 176,770

During December, all direct materials are transferred from Department A, the units in process at December 1 were completed, and of the 26,000 units entering the department, all were completed except 1,000 units that were 70% completed as to conversion costs. Inventories are costed by the first-in, first-out method. Prepare a cost of production report for December. Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems

ANSWER: Erin Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units Whole Units UNITS

Direct Conversion Materials

Units charged to production: Inventory in process, Dec. 1

1,200

Received from Dept. A

26,000

Total units accounted for by Dept. B

27,200

Units to be assigned costs: Inventory in process, Dec. 1 (40% completed)

1,200

720

Started and completed in December

25,000

Transferred to finished goods in December

26,200

25,000

25,720

Inventory in process, Dec. 31 (70% complete)

1,000

700

Total units to be assigned costs

27,200

26,000

26,420

Costs COSTS

Materials Conversion

Total

Costs per equivalent unit: Total costs for December in Dept. B

$845,000

$488,770

Total equivalent units

÷ 26,000

÷ 26,420

Cost per equivalent unit

$ 32.50

$ 18.50

Costs charged to production: Inventory in process, Dec. 1 Copyright Cengage Learning. Powered by Cognero.

47,800 Page 123

Chapter 20 - Process Cost Systems Costs incurred in December

1,333,770

Total costs accounted for by Dept. B

$1,381,570

Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance

$ 47,800

To complete inventory in process, Dec. 1

Started and completed in December

$ 13,320

13,320

812,500

462,500

1,275,000

Transferred to finished goods in December

$1,336,120 32,500

Inventory in process, Dec. 31

12,950

45,450 $1,381,570

Total costs assigned by Dept. B POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:19 AM 182. Everett Company's inventory at December 31 and the costs charged to Work in Process—Department B during December are as follows: 500 units, 60% completed From Department A, 10,000 units Direct labor Factory overhead

$ 3,460 36,300 7,960 12,500

During December, all direct materials are transferred from Department A, and the units in process at December 1 were completed. Of the 10,000 units entering the department, all were completed except 1,200 units that were 25% Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems completed as to conversion costs. Inventories are costed by the first-in, first-out method. Prepare a cost of production report for December. ANSWER: Everett Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units

UNITS

Whole Units

Direct Materials Conversion

Units charged to production: Inventory in process, Dec. 1

500

Received from Dept. A

10,000

Total units accounted for by Dept. B

10,500

Units to be assigned costs: Inventory in process, Dec. 1 (60% completed)

500

200

Started and completed in December

8,800

Transferred to finished goods in December

9,300

8,800

9,000

Inventory in process, Dec. 31 (25% complete)

1,200

300

Total units to be assigned costs

10,500

10,000

9,300

Costs

COSTS

Direct Materials Conversion

Total

Units costs: Total costs for December, Dept. B

$36,300

$20,460

Total equivalent units

÷ 10,000

÷ 9,300

Cost per equivalent unit

$3.63

$2.20

Costs charged to production:

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Chapter 20 - Process Cost Systems

Inventory in process, Dec. 1

$ 3,460

Costs incurred in December

56,760

Total costs accounted for by Dept. B

$60,220

Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory process, Dec. 1 Started and completed in December

$3,460 $

0 31,944

440

19,360

51,304

Transferred to finished goods in December Inventory in process, Dec. 31

$55,204 4,356

Total costs assigned by Dept. B

660

5,016 $60,220

POINTS: DIFFICULTY:

Cost of inventory at process, May 1

$5,010

Units, 800 Direct materials, 100% complete Conversion costs, 70% complete Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems

Units started in May, 14,000

Costs charged to Work in Process during May:

Ending work in process inventory: Direct materials costs, $57,400 Units, 1,500

Direct labor costs, $20,049

Direct materials, 100% complete Factory overhead costs, $30,073 Conversion costs, 30% complete Prepare a cost of production report for the month of May, using the FIFO method. ANSWER: Nichols Manufacturing Company Cost of Production Report For the Month Ended May 31 Equivalent Units

UNITS Beginning work in process (70% complete) Units started & completed (14,000 – 1,500 ending) Ending work in process (30% complete)

Whole Units

Direct Conversion Materials

800

240

12,500

1,500 14,800

1,500 14,000

450 13,190

Costs COSTS Unit costs: Total cost for May *($20,049 + $30,073) Total equivalent units Cost per equivalent unit Costs charged to production: Inventory in process, May 1 Costs incurred in May Total costs accounted for in May Costs allocated to completed and partially completed units: Copyright Cengage Learning. Powered by Cognero.

Direct Materials Conversion $57,400

$50,122*

÷14,000 $4.10

÷13,190 $3.80

Total

$790

$ 5,010 107,522 $112,532

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Chapter 20 - Process Cost Systems Inventory in process, May 1, balance To complete inventory in process, May 1 Started and completed in May Transferred to finished goods, in May Inventory in process, May 31 Total costs accounted for in May

$ 5,010 $

0 $ 912(a) 51,250(b) 47,500(c)

6,150(d)

1,710(e)

912 98,750 $104,672 7,860 $112,532

(a) 240 × $3.80 (b) 12,500 × $4.10 (c) 12,500 × $3.80 (d) 1,500 × $4.10 (e) 450 × $3.80

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/28/2017 7:25 PM 184. Eagle Co. manufactures bentwood chairs and tables. Wood for both products is steam-bent in the same process, but different types of wood are used for each product. Thus, materials cost is identified separately to each product. One production cycle uses 20 board feet. Labor cost is identified to the process as a whole, as is overhead cost. Data for the month of July follow:

Direct material cost per board foot Number of parts formed per production cycle (20 board feet) Actual operating hours in July Parts produced during July Budgeted annual conversion cost: Labor Utilities Depreciation Other overhead Total Copyright Cengage Learning. Powered by Cognero.

Chairs $3.60

Tables $4.20

10 120 4,000

8 380 9,000

$150,000 125,000 65,000 50,000 $390,000 Page 128

Chapter 20 - Process Cost Systems Budgeted annual operating hours for steam-bending

5,200

(a)

Compute July's predetermined rate for the steam-bending process

(b)

Compute July's direct material costs for chairs and tables

(c)

Compute conversion costs to be applied to chairs and tables in July

(d)

Journalize the following entries: (1)

Assignment of direct materials to chairs and tables

(2)

Application of conversion costs to chairs and tables

(3)

The transfer of completed chairs and tables to the Finishing Department. All of July's production was completed in July. (a)

ANSWER:

Steam-bending conversion cost per hour = $390,000/5,200 hrs. = $75 per hour Chairs

(b) Direct material cost per unit: ($3.60/ft. × 20 ft. per cycle) 10 parts per cycle

$7.20

($4.20/ft. × 20 ft. per cycle) 8 parts per cycle Total direct materials cost: (4,000 units × $7.20/unit) (9,000 units × $10.50/unit)

$10.50

$28,800 $94,500

2.25

($75/hr. × 380 hrs./mo.) 9,000 units

3.17 (rounded)

Total conversion cost: (4,000 units × $2.25/unit) (9,000 units × $3.17/unit) (d) (1) Work in Process—Chairs Work in Process—Tables

Tables

$9,000 $28,530 28,800 94,500

Materials Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems 123,300 (2) Work in Process—Chairs Work in Process—Tables Factory Overhead—Chairs Factory Overhead—Tables

9,000 28,530

(3) Finished Goods—Chairs

37,800 123,030

Finished Goods—Tables Work in Process—Chairs 37,800 Work in Process—Tables 123,030

9,000 28,530

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:14 AM 185. Tough Hardware purchases raw materials and processes those purchases through a receiving/inspection process prior to stocking for production. Tough places three purchase orders for materials for production and receives the goods that day. The first purchase order is for 2,500 1/2” × 96” milling blanks at $2.75 each. The second is for 4,000 pieces of 48” × 96” × 1” sheet steel at $15.55 each. The third purchase order is for five 5-gallon drums of milling lubrication oil at $475.00 per barrel. The receiving/inspection process is completed and the goods are transferred from Receiving Inventory to Raw Materials. The Receiving/Inspection Department assigns manufacturing overhead of $55.00 per purchase order as well as $2.75 per piece on metal goods and $35.00 per container on fluids. All labor is allocated through overhead. (a) Prepare the journal entry to purchase and receive these items to Receiving Inventory on account. (b) Assign overhead to the metal goods. (c) Assign overhead to the fluid goods. (d) Transfer all goods to Raw Materials Inventory. ANSWER:

(a) Receiving Inventory Accounts Payable PO 1 - 2,500 pieces × $2.75 each =

71,450 71,450 $ 6,875 Page 130

Chapter 20 - Process Cost Systems PO 2 - 4,000 pieces × $15.55 each = PO 3 - 5 pieces × $475.00 each = Total

62,200 2,375 $71,450

(b) Assign overhead to the metal goods. Receiving Inventory Factory Overhead

17,985

PO 1 - 2,500 pieces × $2.75 each = PO 1 - PO overhead PO 2 - 4,000 pieces × $2.75 each = PO 2 - PO overhead Total

$ 6,875 55 11,000 55 $17,985

17,985

230

PO 3 - 5 pieces × $35.00 each = PO 3 - PO overhead Total

$175 55 $230

230

(d) Transfer all goods to Raw Materials Inventory. Raw Materials Inventory 89,665 Receiving Inventory POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-02 - 20-02 ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:25 AM

89,665

186. The Brass Works is in the process of determining manufacturing overhead. Journalize events (a) through (d) to Factory Overhead, Administrative Expenses, or Selling Expenses, or allocate between the three as appropriate. All items were paid in cash at the time of acquisition. Next, calculate the overhead application rate and apply overhead to Work in Process. (a)

Brass Works purchases an insurance policy for $4,000. It has been determined that 80% of the value of the policy protects production, and the balance protects the administrative offices. Brass Works charges insurance initially to expense.

(b)

The electric bill shows an amount due of $1,200. This meter is utilized only by production,

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Chapter 20 - Process Cost Systems as the office spaces have their own meter. (c)

Payroll reports that the sales manager’s salary for the period is $3,500 and that production supervisors' wages for the period are $5,500.

(d)

The stockroom reports that $2,575 in materials were purchased for the Maintenance Department.

(e)

If the driver for the application of overhead is drop-forge strokes and there are expected to be 1,000 strokes in this period, what is the rate per stroke? Do not round your answer.

(f)

Assuming that there are 1,150 drop-forge strokes in this period, apply factory overhead to Work in Process. Round your answers to the nearest dollar.

Round overhead rate to three decimal places and total cost to the nearest dollar. ANSWER:

(a) Factory Overhead ($4,000 × 80%) Administrative Expenses ($4,000 × 20%) Cash

3,200 800

(b) Factory Overhead Cash

1,200

3,500 5,500

(d) Factory Overhead Accounts Payable

2,575

(e) Factory Overhead Factory Overhead Factory Overhead Factory Overhead Total

4,000

1,200

9,000

2,575 $ 3,200 1,200 5,500 2,575 $12,475

Drop-forge stroke rate = $12,475/1,000 strokes = $12.475 per stroke (f) Work in Process Factory Overhead POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management Copyright Cengage Learning. Powered by Cognero.

14,346 14,346

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Chapter 20 - Process Cost Systems

DATE CREATED: DATE MODIFIED:

BUSPROG: Analytic 1/16/2017 4:19 PM 3/8/2017 9:27 AM

187. The cost of materials transferred into the Bottling Department of Mountain Springs Water Company is $32,400, with $26,000 from the Purifying Department, plus an additional $6,400 from the materials storeroom. The conversion cost for the period in the Bottling Department is $8,750 ($3,750 factory applied and $5,000 direct labor). The total cost transferred to finished goods for the period was $31,980. The Bottling Department had a beginning inventory of $1,860. (a) (b)

Journalize the cost of transferred-in materials, conversion costs, and the cost transferred out to finished goods. Determine the balance of Work in Process—Bottling at the end of the period.

ANSWER:

(a) Work in Process—Bottling Work in Process—Purifying Materials

32,400

Work in Process—Bottling Factory Overhead—Bottling Wages Payable

8,750

Finished Goods Work in Process—Bottling

31,980

26,000 6,400

3,750 5,000

31,980

(b) $11,030 ($1,860 + $32,400 + $8,750 – $31,980) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:28 AM

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Chapter 20 - Process Cost Systems 188. The estimated total factory overhead cost and total machine hours for Department 40 for the current year are $250,000 and 56,250, respectively. During January, the first month of the current year, actual machine hours used totaled 5,100 and factory overhead cost incurred totaled $22,000. (a) (b) (c) (d)

Determine the factory overhead rate based on machine hours. Prepare the journal entry to apply factory overhead to production in Department 40 for January. What is the balance of Factory Overhead—Department 40 at January 31? Does the balance of Factory Overhead—Department 40 at January 31 represent over- or underapplied factory overhead?

Round the factory overhead rate to the nearest cent.

ANSWER:

(a)

$250,000/56,250 = $4.44 per machine hour

(b)

Work in Process—Department 40 Factory Overhead—Department 40 (5,100 × $4.44)

(c)

22,644 22,644

$644 credit

(d) overapplied factory overhead POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:29 AM 189. A firm produces its products by a continuous process involving three production departments, 1 through 3. Prepare journal entries to record the following selected transactions related to production during August: (a) Materials purchased on account, $120,000. (b) Material requisitioned for use in Department 1, $125,700, of which $124,200 entered directly into the product. (c) Labor cost incurred in Department 1, $195,400, of which $174,000 was used directly in the manufacture of the product. (d) Factory overhead costs for Department 1 incurred on account, $54,700. (e) Depreciation on machinery in Department 1, $29,200. (f) Expiration of prepaid insurance chargeable to Department 1, $7,000. (g) Factory overhead applied to production in Department 1, $106,300. (h) Output of Department 1 transferred to Department 2, $362,700. Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems

ANSWER:

(a) Materials Accounts Payable

120,000

(b) Factory Overhead—Department 1 Work in Process—Department 1 Materials

1,500 124,200

21,400 174,000

(d) Factory Overhead—Department 1 Accounts Payable

54,700

(e) Factory Overhead—Department 1 Accumulated Depreciation— Machinery

29,200

(f) Factory Overhead—Department 1 Prepaid Insurance

7,000

(g) Work in Process—Department 1 Factory Overhead—Department 1

106,300

(h) Work in Process—Department 2

362,700

Work in Process—Department 1

120,000

125,700

195,400

54,700

29,200

7,000

106,300

362,700

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:25 AM 190. Fast-Flow Paints produces mixer base paint through a two-stage process, Mixing and Packaging. The following events depict the movement of value into and out of production. Journalize each event if appropriate; if not, provide a short narrative reason as to why you chose not to journalize the action. Nelson, the production manager, accepts an Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems order to continue processing the current run of mixer base paint. (a)

Materials worth $27,000.00 are withdrawn from raw materials inventory. Of this amount, $25,500.00 will be issued to the Mixing Department, and the balance will be issued to the Maintenance Department to be used on production line machines.

(b)

Nelson calculates that labor for the period is $12,500.00. Of this amount, $1,750.00 is for maintenance and indirect labor. The remainder is directly associated with mixing.

(c)

Nelson, who is paid a salary but earns about $35.00 per hour, spends one hour inspecting the production line.

(d)

The manufacturing overhead drivers for mixing are hours of mixer time at $575.00 per hour, and material movements from materials at $125.00 per movement. An inspection of the machine timers reveals that a total of eight hours has been consumed in making this product. An inspection of "stocking orders" indicates that only one material movement was utilized to load the raw materials. (Note: All values have been journalized to Factory Overhead. You need only apply them to the production run.)

(e)

Within Fast-Flow, items are transferred between departments at a standard cost. This production run has created 4,015 gallons of mixer base paint. This paint is transferred to Packaging at a standard cost of $10.05 per gallon. (Round calculation to the nearest whole dollar.)

(f)

Packaging draws $755.00 of materials for packaging of this production run.

(g)

Packaging documents that 12 hours of direct labor at $10.25 per hour were consumed in the packaging of this production run.

(h)

Packaging uses a cost driver of direct labor hours to allocate manufacturing overhead at the rate of $25.00 per hour.

(i)

Packaging transfers 4,015 gallons of packaged goods to Finished Goods Inventory at a standard cost of $10.34 per gallon. (Round calculation to the nearest whole dollar.)

ANSWER:

(a) Work in Process—Mixing Factory Overhead Materials

25,500 1,500

(b) Work in Process—Mixing Factory Overhead Wages Payable

10,750 1,750

27,000

12,500

(c) Nelson’s inspection of the assembly line is not directly chargeable to production. Since he is the manager of a production unit, it will be incorporated in the cost of production through the allocation of overhead. Copyright Cengage Learning. Powered by Cognero.

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Chapter 20 - Process Cost Systems (d) Work in Process—Mixing Factory Overhead

4,725

(e) Work in Process—Packaging Work in Process—Mixing

40,351

4,725

40,351

(f) Work in Process—Packaging Materials

755

(g) Work in Process—Packaging Wages Payable

123

(h) Work in Process—Packaging Factory Overhead

300

(i) Finished Goods Inventory Work in Process—Packaging POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 9:34 AM

755

123

300 41,515 41,515

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Chapter 20 - Process Cost Systems 191. Describe the flow of materials in a process cost accounting system. ANSWER:

When raw materials are purchased, they are debited to Materials. When direct materials are needed in a production department, a materials requisition report is used to move the materials from the storeroom to the production department. Direct materials used are recorded with a debit to Work in Process Inventory for that department and a credit to Materials. Indirect materials used in a department are recorded with a debit to Factory Overhead and a credit to Materials. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-03 - 20-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 192. Zang Co. manufactures its products in a continuous process involving two departments, Machining and Assembly. Prepare journal entries to record the following transactions related to production during June: (a) (b) (c) (d) (e) (f) (g)

Materials purchased on account, $180,000. Materials requisitioned by: Machining, $73,000 direct and $9,000 indirect materials; Assembly, $4,900 indirect materials. Direct labor used by Machining, $23,000; Assembly, $47,000. Depreciation expenses: Machining, $4,500; Assembly, $7,800. Factory overhead applied: Machining, $9,700; Assembly, $11,300. Machining Department transferred $98,300 to Assembly Department; Assembly Department transferred $83,400 to finished goods. Sold goods on account, $100,000; cost of goods sold, $68,000.

ANSWER:

(a) Materials Accounts Payable

180,000

(b) Work in Process—Machining Factory Overhead—Machining Factory Overhead—Assembly Materials

73,000 9,000 4,900

23,000 47,000

180,000

86,900

70,000 Page 138

Chapter 20 - Process Cost Systems

(d) Factory Overhead—Machining

4,500

Factory Overhead—Assembly

7,800 12,300

Accumulated Depreciation (e) Work in Process—Machining

9,700

Work in Process—Assembly

11,300

Factory Overhead—Machining

9,700

Factory Overhead—Assembly

11,300

(f) Work in Process—Assembly

98,300 98,300

Work in Process—Machining Finished Goods

83,400 83,400

Work in Process—Assembly (g) Accounts Receivable

100,000 100,000

Sales Cost of Goods Sold Finished Goods

68,000 68,000

POINTS: DIFFICULTY:

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Chapter 20 - Process Cost Systems 193. The cost of energy consumed in producing good units in the Bottling Department of Mountain Springs Water Company was $36,850 and $39,060 for June and July, respectively. The number of equivalent units produced in June and July was 55,000 and 62,000 liters, respectively. Evaluate the change in the cost of energy between the two months. ANSWER: Energy costs per liter, June:

$36,850 = $0.67 55,000 liters

Energy costs per liter, July:

$39,060 = $0.63 62,000 liters

The cost of energy has decreased by $0.04 ($0.67 – $0.63). POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-04 - 20-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 194. The inventory at June 1 and costs charged to Work in Process—Department 60 during June are as follows: 3,800 units, 80% completed ($25,000 materials, $35,400 conversion) Direct materials, 32,000 units Direct labor Factory overhead Total cost to be accounted for

$ 60,400 368,000 244,000 188,000 $860,400

During June, 32,000 units were placed into production and 31,200 units were completed, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units that were 40% completed. Inventories are costed by the average cost method, and all materials are added at the beginning of the process. Determine the following, presenting your computations: (a) (b) (c) (d)

Equivalent units of production for conversion cost Conversion cost per equivalent unit and material cost per equivalent unit (rounded to the nearest cent) Total and unit cost of finished goods completed in the current period Total cost of work in process inventory at June 30

ANSWER:

(a) Equivalent units of production:

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Chapter 20 - Process Cost Systems Transferred out

31,200

To process units in inventory on June 30 (4,600 × 40%) Equivalent units of production for conversion cost

1,840 33,040

(b) Conversion cost per equivalent unit of production: Conversion costs from beginning inventory

$ 35,400

Direct labor

244,000

Factory overhead

188,000 $467,400

Unit conversion cost ($467,400 ÷ 33,040)

$14.15

Material cost per equivalent unit: From beginning inventory

$ 25,000

Added during the period

368,000

Total

$393,000

Units (3,800 + 32,000)

35,800

Material cost per unit ($393,000 ÷ 35,800)

$10.98

(c) Total and unit cost of finished goods completed in the current period: Unit cost of finished goods completed: Material costs per unit

$10.98

Conversion costs per unit

14.15

Total cost per unit

$25.13

Total costs of goods completed during the period: 31,200 × $25.13

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: LEARNING OBJECTIVES:

(d) Cost of work in process inventory at June 30: Direct materials, 4,600 units at $10.98 Conversion costs, 1,840 units at $14.15 Total cost 1 Challenging Bloom's: Applying Subjective Short Answer False ACCT.WARD.18.20-APP - 20-APP

$784,056

$50,508 26,036 $76,544

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Chapter 20 - Process Cost Systems ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:34 AM 195. On March 1, Upton Company’s Packaging Department had work in process inventory of 8,820 units, which had been transferred in from the Finishing Department. These units had accumulated costs of $315,000 in previous departments and $16,000 for conversion costs in the Packaging Department. During March, 30,000 units were transferred into the department. These units had accumulated costs of $770,000 in the previous departments. The Packaging Department incurred $54,000 in conversion costs during the month. On March 31, 700 units remained in ending inventory. These units were 80% complete with respect to conversion costs. Calculate the cost per equivalent unit for transferred-in costs and for conversion costs for the Packaging Department using the average cost method. Rounded to the nearest cent. ANSWER:

Units transferred out = 8,820 + 30,000 – 700 = 38,120 Transferred-in costs = ($315,000 + $770,000)/(38,120 + 700) = $27.95 per equivalent unit

Conversion costs = ($16,000 + $54,000)/(38,120 + 560) = $1.81 per equivalent unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:35 AM

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Chapter 20 - Process Cost Systems 196. On August 1, Jones Corporation’s Packaging Department had work in process inventory of 8,000 units that were 75% complete with respect to materials and 30% complete with respect to conversion costs. The cost of these units was $99,525 ($62,000 transferred in from previous departments, $28,775 in materials, and $8,750 in labor and overhead). During August, 125,000 units were transferred into the department. These units had accumulated costs in previous departments of $1,418,560. The Packaging Department incurred costs of $799,225 for materials and $498,010 for conversion costs in August and transferred 131,000 units out of the department. The 2,000 units remaining in ending inventory are 50% complete with respect to materials and 20% complete with respect to conversion costs. Jones uses the average cost method to cost its inventories.

(a) Calculate the cost per equivalent unit for transferred-in costs, materials, and conversion costs (rounded to the nearest cent). (b) Calculate the cost of the units transferred out of the department. (c) Calculate the cost of the ending inventory. ANSWER:

(a) Cost per equivalent unit: Transferred-In Costs = ($62,000 + $1,418,560)/133,000 = $11.13 Materials = ($28,775 + $799,225)/(131,000 + 1,000) = $6.27 Conversion Costs = ($8,750 + $498,010)/(131,000 + 400) = $3.86 (b) Units Transferred Out = ($11.13 + $6.27 + $3.86) × 131,000 = $2,785,060

(c) Ending Inventory = (2,000 × $11.13) + (2,000 × 50% × $6.27) + (2,000 × 20% × $3.86) = $30,074 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:37 AM

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Chapter 20 - Process Cost Systems 197. Discuss how equivalent units are computed under the average cost method. ANSWER:

Under average costing, equivalent units equal: a) all work done to date on units transferred out regardless of whether work was completed in prior period or current period and b) work done to start ending inventory POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 2/28/2017 11:28 AM 198. Kamin Company’s Mixing Department had a beginning inventory of 4,000 units, which had accumulated conversion costs of $55,000. During the period, the Mixing Department accumulated conversion costs of $92,000 and started 8,000 new units. Ending inventory was 2,500 units which were 40% complete with respect to conversion costs. Kamin uses the average cost method to cost inventories. Calculate the cost per equivalent unit for conversion costs in the Mixing Department. ANSWER:

Units Transferred Out = 4,000 + 8,000 – 2,500 = 9,500 units Equivalent Units = 9,500 + (2,500 × 40%) = 10,500

Cost per equivalent unit for conversion costs = ($55,000 + $92,000)/10,500 = $14 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.20-APP - 20-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.35 - Process Costing ACCT.IMA.07 - Cost Management BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 8:38 AM

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Chapter 21 - Cost-Volume-Profit Analysis True / False 1. Cost behavior refers to the methods used to estimate costs for use in managerial decision making. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Bloom's: Remembering Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 2. Cost behavior refers to the manner in which a cost changes as the related activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

Page 1

Chapter 21 - Cost-Volume-Profit Analysis 3. The fixed cost per unit varies with changes in the level of activity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 4. A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

Page 2

Chapter 21 - Cost-Volume-Profit Analysis 5. Direct materials cost that varies with the number of units produced is an example of a fixed cost of production. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 6. In order to choose the proper activity base for a cost, a managerial accountant must be familiar with the operations of the entity. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 21 - Cost-Volume-Profit Analysis 7. The relevant range is useful for analyzing cost behavior for management decision-making purposes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 8. The relevant activity base for a cost depends on which base is most closely associated with the cost and the decision-making needs of management. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 9. The range of activity over which changes in cost are of interest to management is called the relevant range. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 11. Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 12. Variable costs are costs that remain constant in total dollar amount as the level of activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 13. Variable costs are costs that remain constant on a per-unit basis as the level of activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 14. Variable costs are costs that vary in total in direct proportion to changes in the activity level. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 15. Variable costs are costs that vary on a per-unit basis with changes in the activity level. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom’s: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 17. Total variable costs change as the level of activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 18. Unit variable cost does not change as the number of units of activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 19. A mixed cost has characteristics of both variable and fixed costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 11:27 AM 20. Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours are an example of a fixed cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 21. A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 23. The contribution margin ratio is the same as the profit-volume ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 24. Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 25. The dollars available from each unit of sales to cover fixed cost and profit are the unit variable cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:39 AM 26. The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide operating income is termed the contribution margin ratio. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 27. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%. a. True b. False ANSWER: RATIONALE:

False Contribution Margin Ratio = Contribution Margin/Sales = Sales – Variable Costs/Sales = $2,000,000 – ($2,000,000 × 0.60)/$2,000,000 = ($2,000,000 – $1,200,000)/$2,000,000 = 40% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 28. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%. a. True b. False ANSWER: RATIONALE:

True Contribution Margin Ratio = Contribution Margin/Sales = Sales – Variable Costs/Sales = $2,000,000 – ($2,000,000 × 0.60)/$2,000,000 = ($2,000,000 – $1,200,000)/$2,000,000 = 40% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 29. The data required for determining the break-even point for a business are the total estimated fixed costs for a period, stated as a percentage of net sales. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 30. If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is $0 when sales revenue is $930,000. a. True b. False ANSWER: RATIONALE:

False Sales Revenue at which Profit Is $0 = Fixed Cost/Contribution Margin Ratio = $500,000/40% = $1,250,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:44 AM

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Chapter 21 - Cost-Volume-Profit Analysis 31. If fixed costs are $850,000 and the unit contribution margin is $50, profit is $0 when 15,000 units are sold. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Profit is $0 when 17,000 units are sold ($850,000/$50). 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:45 AM 32. The point in operations at which revenues and expenses are exactly equal is called the break-even point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 33. Break-even analysis is one type of cost-volume-profit analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 34. If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 35. If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 36. If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 37. If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 38. If direct materials cost per unit increases, the break-even point will decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 39. If direct materials cost per unit increases, the break-even point will increase. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 40. If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 41. If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units. a. True b. False ANSWER: RATIONALE:

True Operating Income = Contribution Margin – Fixed Costs $50,000 = ($50 × Number of Units) – $450,000 Number of Units = ($50,000 + $450,000)/$50 = 10,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 42. If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units. a. True b. False ANSWER: RATIONALE:

False Operating Income = Contribution Margin – Fixed Costs $30,000 = ($30 × Number of Units) – $650,000 Number of Units = ($30,000 + $650,000)/$30 = 22,667 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21 - Cost-Volume-Profit Analysis 43. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 44. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 45. Cost-volume-profit analysis can be presented in both equation form and graphic form. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 46. If a business sells two products, it is not possible to estimate the break-even point. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 47. If a business sells four products, it is not possible to estimate the break-even point. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 49. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units. a. True b. False ANSWER: RATIONALE:

False Margin of Safety = (Sales – Sales at Break-Even Point)/Sales = ($3,000,000 – $2,500,000)/$3,000,000 = 17%; Margin of Safety (in units) = ($3,000,000 × 17%)/$40 = 12,750 units POINTS: 1 DIFFICULTY: Bloom's: Applying Challenging QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 50. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units. a. True b. False ANSWER: RATIONALE:

False Margin of Safety = (Sales – Sales at Break-Even Point)/Sales = ($3,000,000 – $2,500,000)/$3,000,000 = 17% Margin of Safety (in units) = ($3,000,000 × 17%)/$40 = 12,750 units POINTS: 1 DIFFICULTY: Bloom's: Applying Challenging QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 51. If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%. a. True b. False ANSWER: RATIONALE:

False Margin of Safety = (Sales – Sales at Break-Even Point)/Sales = ($6,000,000 – $4,800,000)/$6,000,000 = 20% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 52. If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%. a. True b. False ANSWER: RATIONALE:

False Margin of Safety = (Sales – Sales at Break-Even Point)/Sales = ($7,000,000 – $4,800,000)/$7,000,000 = 31.4% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21 - Cost-Volume-Profit Analysis 53. Companies with large amounts of fixed costs will generally have a high operating leverage. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 54. A low operating leverage is normal for highly automated industries. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 55. Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's operating income will increase by 50%. a. True b. False ANSWER: RATIONALE:

True Percent Change in Income from Operations = Percent Change in Sales × Operating Leverage = 10% × 5 = 50% POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 56. The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be accurately divided into fixed and variable components. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 57. Absorption costing is required for financial reporting under generally accepted accounting principles. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 58. The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 59. In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Challenging Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 60. Assuming no other changes, operating income will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis Multiple Choice 61. Cost behavior refers to the manner in which a cost a. changes as the related activity changes b. is allocated to products c. is used in setting selling prices d. is estimated ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:53 AM 62. The three most common cost behavior classifications are a. variable costs, product costs, and sunk costs b. fixed costs, variable costs, and mixed costs c. variable costs, period costs, and differential costs d. variable costs, sunk costs, and opportunity costs ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 63. Costs that remain constant in total dollar amount as the level of activity changes are called a. fixed costs b. mixed costs c. product costs d. variable costs ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis

Figure 21-1 64. Which of the graphs in Figure 21-1 illustrates the behavior of a total fixed cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 21-1 LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 65. Which of the graphs in Figure 21-1 illustrates the behavior of a total variable cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 21-1 LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 66. Which of the graphs in Figure 21-1 illustrates the nature of a mixed cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 21-1 LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 67. Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes? a. direct labor b. salary of a factory supervisor c. units-of-production depreciation on factory equipment d. direct materials ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 68. Which of the following describes the behavior of the fixed cost per unit? a. decreases with increasing production b. decreases with decreasing production c. remains constant with changes in production d. increases with increasing production ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 69. Which of the following activity bases would be the most appropriate for food costs of a hospital? a. number of nurses scheduled to work b. number of MRIs taken c. number of patients who stay in the hospital d. quantity of prescriptions filled ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:54 AM 70. Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service? a. number of truck drivers b. total miles driven c. number of trucks in service d. number of packages picked up ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 71. Most operating decisions of management focus on a narrow range of activity called the a. relevant range of production b. strategic level of production c. optimal level of production d. tactical operating level of production ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 72. Costs that vary in total in direct proportion to changes in an activity level are called a. fixed costs b. sunk costs c. variable costs d. differential costs ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 73. Which of the following is an example of a cost that varies in total as the number of units produced changes? a. salary of a production supervisor b. direct materials cost c. property taxes on factory buildings d. straight-line depreciation on factory equipment ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 74. Which of the following is not an example of a cost that varies in total as the number of units produced changes? a. electricity per KWH to operate factory equipment b. direct materials cost c. straight-line depreciation on factory equipment d. wages of assembly worker ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 75. Which of the following is not an example of a cost that varies in total as the number of units produced changes? a. electricity per KWH to operate factory equipment b. direct materials cost c. insurance premiums on factory building d. wages of assembly worker ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 76. Which of the following describes the behavior of a variable cost per unit? a. varies in increasing proportion with changes in the activity level b. varies in decreasing proportion with changes in the activity level c. remains constant with changes in the activity level d. varies in direct proportion with the activity level ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 77. The graph of a variable cost when plotted against its related activity base appears as a a. circle b. rectangle c. straight line d. curved line ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 78. A cost that has characteristics of both a variable cost and a fixed cost is called a a. variable/fixed cost b. mixed cost c. discretionary cost d. sunk cost ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 79. Which of the following costs is a mixed cost? a. salary of a factory supervisor b. electricity costs of $3 per kilowatt-hour c. rental costs of $10,000 per month plus $0.30 per machine hour of use d. straight-line depreciation on factory equipment ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 80. For purposes of analysis, mixed costs are a. classified as fixed costs b. classified as variable costs c. classified as period costs d. separated into their variable and fixed cost components ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 81. Strait Co. manufactures office furniture. During the most productive month of the year, 3,000 desks were manufactured at a total cost of $59,000. In the month of lowest production the company made 1,125 desks at a cost of $38,000. Using the high-low method of cost estimation, total fixed costs are a. $21,000 b. $25,400 c. $42,000 d. $13,000 ANSWER: RATIONALE:

b Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $59,000 – $38,000 = $21,000 Variable Cost per Unit = Difference in Total Cost/Difference in Units Produced = $21,000/1,875 = $11.20 Total Fixed Costs (Highest Level) = Total Costs – (Variable Cost per Unit × Units Produced) = $59,000 – ($11.20 × 3,000) = $25,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 82. Given the following cost and activity observations for Bounty Company’s utilities, use the high-low method to calculate Bounty’s variable utilities cost per machine hour. Round to the nearest cent.

Cost March April May June

$3,100 2,700 2,900 3,600

Machine Hours 15,000 10,000 12,000 18,000

a. $10.00 b. $0.67 c. $0.63 d. $0.11 ANSWER: RATIONALE:

d Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $3,600 – $2,700 = $900 Variable Cost per Machine Hour = Difference in Total Cost/Difference in Machine Hours = $900/(18,000 – 10,000) = $0.11 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:57 AM

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Chapter 21 - Cost-Volume-Profit Analysis 83. Given the following cost and activity observations for Smithson Company’s utilities, use the high-low method to calculate Smithson’s fixed costs per month. Do not round intermediate calculations.

Cost January February March April

$52,200 75,000 57,000 64,000

Machine Hours 20,000 29,000 22,000 24,500

a. $1,533 b. $2,530 c. $22,800 d. $50,600 ANSWER: RATIONALE:

a Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $75,000 – $52,200 = $22,800 Variable Cost per Machine Hour = Difference in Total Cost/Difference in Machine Hours = $22,800/(29,000 – 20,000) = $2.53 Total Fixed Costs (Highest Level) = Total Costs – (Variable Cost per Unit × Machine Hours) = $75,000 – ($2.53 × 29,000) = $1,533 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:58 AM

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Chapter 21 - Cost-Volume-Profit Analysis 84. Given the following cost and activity observations for George Company’s utilities, use the high-low method to calculate George’s variable utilities cost per machine hour.

Cost May

$16,500

Machine Hours 105,000

June

18,000

120,000

July

16,000

100,000

August

17,500

117,000

a. $100.00 b. $1.00 c. $10.00 d. $0.10 ANSWER: RATIONALE:

d Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $18,000 – $16,000 = $2,000 Variable Cost per Machine Hour = Difference in Total Cost/Difference in Machine Hours = $2,000/(120,000 – 100,000) = $0.10 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 11:59 AM

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Chapter 21 - Cost-Volume-Profit Analysis 85. Manley Co. manufactures office furniture. During the most productive month of the year, 4,500 desks were manufactured at a total cost of $86,625. In its slowest month, the company made 1,800 desks at a cost of $49,500. Using the high-low method of cost estimation, total fixed costs a. are $61,875 b. are $33,875 c. are $24,750 d. cannot be determined from the data given ANSWER: RATIONALE:

c Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $86,625 – $49,500 = $37,125 Variable Cost per Unit = Difference in Total Cost/Difference in Machine Hours = $37,125/(4,500 – 1,800) = $13.75 Total Fixed Costs (Highest Level) = Total Costs – (Variable Cost per Unit × Machine Hours) = $86,625 – ($13.75 × 4,500) = $24,750 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:01 PM

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Chapter 21 - Cost-Volume-Profit Analysis 86. Which of the following statements is true regarding fixed and variable costs? a. Both costs are constant when considered on a per-unit basis. b. Both costs are constant when considered on a total basis. c. Fixed costs are constant in total, and variable costs are constant per unit. d. Variable costs are constant in total, and fixed costs vary in total. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 87. As production increases, the fixed cost per unit a. increases b. decreases c. remains the same d. either increases or decreases, depending on the variable costs ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 88. Understanding how costs behave is useful to management for all the following reasons except a. predicting customer demand b. predicting profits as sales and production volumes change c. estimating costs d. changing an existing product production ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 89. The manufacturing cost of Calico Industries for three months of the year are provided below.

April May June

Total Cost $120,000 74,000 90,900

Production (units) 280,000 165,000 230,000

Using the high-low method, the variable cost per unit and the total fixed costs are a. $0.78 per unit and $4,000 b. $0.40 per unit and $8,000 c. $4.00 per unit and $800 d. $7.80 per unit and $4,000 ANSWER: RATIONALE:

b Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $120,000 – $74,000 = $46,000 Variable Cost per Unit = Difference in Total Cost/Difference in Machine Hours = $46,000/(280,000 – 165,000) = $0.40 Total Fixed Costs (Highest Level) = Total Costs – (Variable Cost per Unit × Machine Hours) = $120,000 – ($0.40 × 280,000) = $8,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:02 PM

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Chapter 21 - Cost-Volume-Profit Analysis 90. As production increases, variable costs per unit a. stay the same b. increase c. decrease d. either increase or decrease, depending on the fixed costs ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 91. Thompson Company manufactures and sells cookware. Because of current trends, it expects to increase sales by 15% next year. If this expected level of production and sales occurs and plant expansion is not needed, how should this increase affect next year’s total amounts for the following costs? Variable Costs a. b. c. d.

increase increase no change decrease

Fixed Costs increase no change no change increase

Mixed Costs increase increase increase increase

ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:04 PM

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Chapter 21 - Cost-Volume-Profit Analysis 92. Given the following costs and activities for Dance Company, use the high-low method to calculate Dance’s variable electrical costs per machine hour.

August September October

Costs $11,700 13,200 11,400

Machine Hours 15,000 17,500 14,500

a. $2.08 b. $6.00 c. $0.60 d. $1.20 ANSWER: RATIONALE:

c Difference in Total Cost = Total Cost (Highest Level) – Total Cost (Lowest Level) = $13,200 – $11,400 = $1,800; Variable Cost per Machine Hour = Difference in Total Cost/Difference in Machine Hours = $1,800/(17,500 – 14,500) = $0.60 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 11:33 AM

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Chapter 21 - Cost-Volume-Profit Analysis 93. Given the following cost data, what type of cost is shown? Cost per Unit $6,000 3,000 2,000 1,500

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:06 PM

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Chapter 21 - Cost-Volume-Profit Analysis 94. Given the following cost data, what type of cost is shown? Total Cost $8,000 8,500 9,000 9,500

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:08 PM

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Chapter 21 - Cost-Volume-Profit Analysis 95. Given the following cost data, what type of cost is shown? Total Cost $20 40 60 80

Number of Units 1 2 3 4

a. mixed cost b. variable cost c. fixed cost d. period cost ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:41 PM

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Chapter 21 - Cost-Volume-Profit Analysis 96. The systematic examination of the relationships among selling prices, volume of sales and production, costs, and profits is termed a. contribution margin analysis b. cost-volume-profit analysis c. budgetary analysis d. gross profit analysis ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 97. In cost-volume-profit analysis, all costs are classified into which of the following two categories? a. mixed costs and variable costs b. sunk costs and fixed costs c. discretionary costs and sunk costs d. variable costs and fixed costs ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:42 PM

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Chapter 21 - Cost-Volume-Profit Analysis 98. Contribution margin is a. the excess of sales revenue over variable cost b. another term for volume in the "cost-volume-profit" analysis c. profit d. the same as sales revenue ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 99. The contribution margin ratio is the a. same as the variable cost ratio b. same as profit c. portion of equity contributed by stockholders d. same as the profit-volume ratio ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:42 PM

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Chapter 21 - Cost-Volume-Profit Analysis 100. If sales are $820,000, variable costs are 55% of sales, and operating income is $260,000, what is the contribution margin ratio? a. 45% b. 55% c. 62% d. 32% ANSWER: RATIONALE:

a Contribution Margin = Sales – Variable Costs = $820,000 – ($820,000 × 55%) = $820,000 – $451,000 = $369,000 Contribution Margin Ratio = Contribution Margin/Sales = $369,000/$820,000 = 45% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 101. What ratio indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit? a. margin of safety ratio b. contribution margin ratio c. costs and expenses ratio d. profit ratio ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 102. A firm operated at 90% of capacity for the past year, during which fixed costs were $420,000, variable costs were 40% of sales, and sales were $1,000,000. Operating profit was a. $180,000 b. $420,000 c. $1,080,000 d. $980,000 ANSWER: RATIONALE:

a Variable Costs = $1,000,000 × 40% = $400,000 Contribution Margin = Sales – Variable Costs = $1,000,000 – $400,000 = $600,000 Operating Profit = Contribution Margin – Fixed Costs = $600,000 – $420,000 = $180,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 103. If sales are $425,000, variable costs are 62% of sales, and operating income is $50,000, what is the contribution margin ratio? a. 38% b. 26.8% c. 11.8% d. 62% ANSWER: RATIONALE:

a Contribution Margin = Sales – Variable Costs = $425,000 – ($425,000 × 62%) = $425,000 – $263,500 = $161,500 Contribution Margin Ratio = Contribution Margin/Sales = $161,500/$425,000 = 38% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 104. Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will operating income change if sales increase by $40,000? a. $8,000 increase b. $8,000 decrease c. $30,000 decrease d. $30,000 increase ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 105. Spice Inc.'s unit selling price is $60, unit variable costs are $35, fixed costs are $125,000, and current sales are 10,000 units. How much will operating income change if sales increase by 8,000 units? a. $150,000 decrease b. $175,000 increase c. $200,000 increase d. $150,000 increase ANSWER: RATIONALE:

c Change in Income from Operations = Change in Sales Units × Unit Contribution Margin = 8,000 × ($60 – $35) = $200,000 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:46 PM

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Chapter 21 - Cost-Volume-Profit Analysis 106. Bryce Co. sales are $914,000, variable costs are $498,130, and operating income is $196,000. What is the contribution margin ratio? a. 52.2% b. 28.4% c. 54.5% d. 45.5% ANSWER: RATIONALE:

d Contribution Margin Ratio = (Sales – Variable Costs)/Sales = ($914,000 – $498,130)/$914,000 = 45.5%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 107. A firm operated at 80% of capacity for the past year, during which fixed costs were $330,000, variable costs were 70% of sales, and sales were $1,000,000. Operating profit (loss) was a. $140,000 b. $(30,000) c. $370,000 d. $670,000 ANSWER: RATIONALE:

b Operating Profit (Loss) = (Sales – Variable Costs – Fixed Costs) = $1,000,000 – (70% × $1,000,000) – $330,000 = $(30,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 108. Lee Industry's sales are $525,000, variable costs are 53% of sales, and operating income is $19,000. What is the contribution margin ratio? a. 47% b. 26.5% c. 9.5% d. 53% ANSWER: RATIONALE:

a Contribution Margin Ratio = (Sales – Variable Costs)/Sales = [$525,000 – (53% × $525,000)]/$525,000 = 47% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:49 PM

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Chapter 21 - Cost-Volume-Profit Analysis 109. Zipee Inc.'s unit selling price is $90, unit variable costs are $40.50, fixed costs are $170,000, and current sales are 12,000 units. How much will operating income change if sales increase by 5,000 units? a. $125,000 decrease b. $175,000 increase c. $75,000 increase d. $247,500 increase ANSWER: RATIONALE:

d U nit Contribution Margin = Sales Price per Unit – Variable Cost per Unit = $90 – $40.50 = $49.50 Change in Income from Operations = Change in Sales Units × Unit Contribution Margin = 5,000 units × $49.50 = $247,500 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:50 PM

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Chapter 21 - Cost-Volume-Profit Analysis 110. Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio (rounded to the nearest whole percent) and the unit contribution margin are a. 47% and $11 per unit b. 53% and $7 per unit c. 47% and $8 per unit d. 52% and $11 per unit ANSWER: RATIONALE:

d Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit = $21 – $10 = $11 Contribution Margin Ratio = Contribution Margin/Sales Price per Unit = $11/$21 = 52% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:51 PM

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Chapter 21 - Cost-Volume-Profit Analysis 111. If the contribution margin ratio for France Company is 45%, sales were $425,000, and fixed costs were $100,000, what was the income from operations? a. $233,750 b. $91,250 c. $191,250 d. $133,750 ANSWER: RATIONALE:

b Contribution Margin Ratio = Contribution Margin/Sales Contribution Margin = 45% × $425,000 = $191,250 Income from Operations = Contribution Margin – Fixed Costs = $191,250 – $100,000 = $91,250 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 112. If fixed costs are $250,000, the unit selling price is $125, and the unit variable costs are $73, what are the break-even sales in units (rounded to a whole number)? a. 3,425 units b. 2,381 units c. 2,000 units d. 4,808 units ANSWER: RATIONALE:

d Break-Even Sales (units) = Fixed Costs/Unit Contribution Margin = $250,000/($125 – $73) = 4,808 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:56 PM

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Chapter 21 - Cost-Volume-Profit Analysis 113. If fixed costs are $750,000 and variable costs are 60% of sales, what is the break-even point in sales dollars? a. $1,250,000 b. $450,000 c. $1,875,000 d. $300,000 ANSWER: RATIONALE:

c Contribution Margin Ratio = (Sales Price – Variable Cost)/Sales = 1 – 0.60 = 40% Break-Even Sales (dollars) = Fixed Costs/Contribution Margin Ratio = $750,000/40% = $1,875,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 114. If fixed costs are $1,200,000, the unit selling price is $240, and the unit variable costs are $110, what is the amount of sales in units (rounded to a whole number) required to realize an operating income of $200,000? a. 9,231 units b. 12,000 units c. 10,769 units d. 5,833 units ANSWER: RATIONALE:

c Sales (units) = (Fixed Costs + Target Profit)/Unit Contribution Margin = ($1,200,000 + $200,000)/($240 – $110) = 10,769 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:58 PM 115. If fixed costs are $300,000, the unit selling price is $31, and the unit variable costs are $22, what are the break-even sales (units) if fixed costs are reduced by $30,000? a. 30,000 units b. 8,710 units c. 12,273 units d. 20,000 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 116. If fixed costs are $500,000, the unit selling price is $55, and the unit variable costs are $30, what are the break-even sales (units) if fixed costs are increased by $80,000? a. 10,545 units b. 19,333 units c. 23,200 units d. 25,000 units ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 12:59 PM 117. Reynold's Grocery has fixed costs of $350,000, the unit selling price is $29, and the unit variable costs are $20. What are the break-even sales in units (rounded to a whole number) if the variable costs are decreased by $4? a. 26,923 units b. 12,069 units c. 21,875 units d. 38,889 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 118. If fixed costs are $450,000, the unit selling price is $75, and the unit variable costs are $50, what are the old and new break-even sales in units (rounded to a whole number) if the unit selling price increases by $10? a. 6,000 units and 5,294 units b. 18,000 units and 6,000 units c. 18,000 units and 12,857 units d. 9,000 units and 15,000 units ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:00 PM 119. If fixed costs are $400,000 and the unit contribution margin is $20, what amount of units must be sold in order to have a zero profit? a. 25,000 units b. 10,000 units c. 400,000 units d. 20,000 units ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 120. Johnson Plumbing's fixed costs are $700,000 and the unit contribution margin is $17. What amount of units (rounded to a whole number) must be sold in order to realize an operating income of $100,000? a. 5,000 b. 41,176 c. 47,059 d. 58,882 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:01 PM 121. If fixed costs are $500,000 and the unit contribution margin is $20, what is the break-even point in units if fixed costs are reduced by $80,000? a. 25,000 b. 29,000 c. 4,000 d. 21,000 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 122. If fixed costs are $600,000 and the unit contribution margin is $40, what is the break-even point if fixed costs are increased by $90,000? a. 17,250 b. 15,000 c. 8,333 d. 9,667 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 123. If fixed costs are $561,000 and the unit contribution margin is $8.00, what is the break-even point in units if variable costs are decreased by $0.50 a unit? a. 66,000 b. 70,125 c. 74,800 d. 60,000 ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 124. If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in wage rates ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:01 PM 125. If variable costs per unit decreased because of a decrease in utility rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in utility rates ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:02 PM

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Chapter 21 - Cost-Volume-Profit Analysis 126. If fixed costs increased and variable costs per unit decreased, the break-even point a. would increase b. would decrease c. would remain the same d. cannot be determined from the data provided ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:02 PM 127. Which of the following conditions would cause the break-even point to decrease? a. total fixed costs increase b. unit selling price decreases c. unit variable cost decreases d. unit variable cost increases ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 128. Which of the following conditions would cause the break-even point to increase? a. total fixed costs decrease b. unit selling price increases c. unit variable cost decreases d. unit variable cost increases ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 129. Which of the following conditions would cause the break-even point to increase? a. total fixed costs increase b. unit selling price increases c. unit variable cost decreases d. total fixed costs decrease ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 130. Charlotte Co. has budgeted salary increases to factory supervisors totaling 9%. If selling prices and all other cost relationships are held constant, next year's break-even point a. will decrease by 9% b. will increase by 9% c. cannot be determined from the data given d. will increase at a rate greater than 9% ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 131. Flying Cloud Co. has the following operating data for its manufacturing operations: Unit selling price Unit variable cost Total fixed costs

250 100 840,000

The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be a. increased by 640 units b. increased by 400 units c. decreased by 640 units d. increased by 800 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 132. If fixed costs are $850,000 and variable costs are 60% of sales, what is the break-even point (dollars)? a. $2,125,000 b. $340,000 c. $3,400,000 d. $1,416,666 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 133. O'Boyle Co.'s fixed costs are $256,000, the unit selling price is $36, and the unit variable costs are $20. What is the break-even sales (units)? a. 12,800 units b. 4,571 units c. 16,000 units d. 7,111 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 134. Piper Technology's fixed costs are $1,500,000, the unit selling price is $250, and the unit variable costs are $130. What is the amount of sales in units (rounded to a whole number) required to realize an operating income of $200,000? a. 14,167 units b. 12,500 units c. 16,000 units d. 11,538 units ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:08 PM 135. Payton Industries has fixed costs of $490,000, the unit selling price is $35, and the unit variable costs are $20. What are the break-even sales (units) if fixed costs are reduced by $40,000? a. 32,667 units b. 14,000 units c. 30,000 units d. 24,500 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 136. Connor Company's fixed costs are $400,000, the unit selling price is $25, and the unit variable costs are $15. What are the break-even sales (units) if the variable costs are increased by $2? a. 50,000 units b. 30,770 units c. 40,000 units d. 26,667 units ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:09 PM 137. Jacob Inc. has fixed costs of $240,000, the unit selling price is $32, and the unit variable costs are $20. What are the old and new break-even sales (units) if the unit selling price increases by $4? a. 7,500 units and 6,667 units b. 20,000 units and 30,000 units c. 20,000 units and 15,000 units d. 12,000 units and 15,000 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 138. When Isaiah Company has fixed costs of $120,000 and the contribution margin is $30, the break-even point is a. 16,000 units b. 8,000 units c. 6,000 units d. 4,000 units ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 139. Kaden Company's fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24. What are the break-even sales (units)? a. 2,400 b. 1,950 c. 1,114 d. 2,600 ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 140. If fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24, what are the break-even sales (units) if the variable costs are decreased by $2? a. 2,127 b. 1,114 c. 2,340 d. 1,950 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:11 PM 141. The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents the a. maximum possible operating loss b. maximum possible operating income c. total fixed costs d. break-even point ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:11 PM

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Chapter 21 - Cost-Volume-Profit Analysis 142. The point where the profit line intersects the horizontal axis on the profit-volume chart represents the a. maximum possible operating loss b. maximum possible operating income c. total fixed costs d. break-even point ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:12 PM 143. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. This is called a. "what if" or sensitivity analysis b. vary the data analysis c. computer-aided analysis d. data gathering ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:12 PM

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Chapter 21 - Cost-Volume-Profit Analysis 144. Which of the following is not an assumption underlying cost-volume-profit analysis? a. The break-even point will be passed during the period. b. Total sales and total costs can be represented by straight lines. c. Costs can be accurately divided into fixed and variable components. d. The sales mix is constant. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 145. In a cost-volume-profit chart, the a. total cost line begins at zero b. slope of the total cost line is dependent on the fixed cost per unit c. total cost line begins at the total fixed cost value on the vertical axis d. total cost line normally ends at the highest sales value ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 146. The relative distribution of sales among the various products sold by a business is the a. business's basket of goods b. contribution margin mix c. sales mix d. product portfolio ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 147. When a business sells more than one product at varying selling prices, the business's break-even point can be determined as long as the number of products does not exceed a. two b. three c. fifteen d. There is no limit. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/8/2017 11:37 AM

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Chapter 21 - Cost-Volume-Profit Analysis Use this information for Carter Co. to answer the questions that follow. Carter Co. sells two products, arks and bins. Last year, Carter sold 14,000 units of arks and 56,000 units of bins. Related data are as follows:

Product Arks Bins

Unit Selling Price $120 80

Unit Variable Cost $80 60

Unit Contribution Margin $40 20

148. What was Carter Co.'s sales mix last year? a. 20% arks, 80% bins b. 12% arks, 28% bins c. 70% arks, 30% bins d. 40% arks, 20% bins ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carter Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/2/2017 1:14 PM

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Chapter 21 - Cost-Volume-Profit Analysis 149. What was Carter Co.'s unit selling price of E, with E representing one overall "enterprise" product? a. $200 b. $100 c. $80 d. $88 ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carter Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 150. What was Carter Co.'s variable cost of E? a. $140 b. $70 c. $64 d. $60 ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carter Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 151. What was Carter Co.'s unit contribution margin of E? a. $24 b. $60 c. $92 d. $20 ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carter Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 152. Assuming that last year's fixed costs totaled $960,000, what was Carter Co.'s break-even point in units? a. 40,000 units b. 12,000 units c. 35,000 units d. 28,000 units ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 153. If a business had sales of $4,000,000 and a margin of safety of 25%, the break-even point was a. $5,000,000 b. $3,000,000 c. $12,000,000 d. $1,000,000 ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 154. Forde Co. has an operating leverage of 4. Sales are expected to increase by 12% next year. Operating income is a. unaffected b. expected to increase by 3% c. expected to increase by 48% d. expected to increase by 4% ANSWER: POINTS: DIFFICULTY:

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Chapter 21 - Cost-Volume-Profit Analysis 155. If sales are $400,000, variable costs are 80% of sales, and operating income is $40,000, what is the operating leverage? a. 0.0 b. 7.5 c. 2.0 d. 1.3 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 156. The difference between the current sales revenue and the sales at the break-even point is called the a. contribution margin b. margin of safety c. price factor d. operating leverage ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 157. Cost-volume-profit analysis cannot be used if which of the following occurs? a. Costs cannot be properly classified into fixed and variable costs. b. The total fixed costs change. c. The per-unit variable costs change. d. Per-unit sales prices change. ANSWER: POINTS: DIFFICULTY:

a 1 Bloom's: Understanding Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:19 PM DATE MODIFIED: 3/1/2017 11:36 AM 158. Assume that Corn Co. sold 8,000 units of Product A and 2,000 units of Product B during the past year. The unit contribution margins for Products A and B are $30 and $60, respectively. Corn has fixed costs of $378,000. The break-even point in units is a. 8,000 units b. 6,300 units c. 12,600 units d. 10,500 units ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 159. Harley Company has sales of $500,000, variable costs are 75% of sales, and operating income is $40,000. What is Harley's operating leverage? a. 0.0 b. 1.2 c. 1.3 d. 3.1 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 160. Rocky Company reports the following data: Sales Variable costs Fixed costs

$800,000 300,000 120,000

Rocky Company’s operating leverage is a. 6.7 b. 2.7 c. 1.0 d. 1.3 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:17 PM

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Chapter 21 - Cost-Volume-Profit Analysis Use this information for Rusty Co. to answer the questions that follow. Rusty Co. sells two products, X and Y. Last year, Rusty sold 5,000 units of X and 35,000 units of Y. Related data are as follows:

Product X Y

Unit Selling Price Price $110 70

Unit Variable Cost $70 50

Unit Contribution Margin $40 20

161. What was Rusty Co.’s weighted average unit selling price? a. $180 b. $75 c. $100 d. $110 ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rusty Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:18 PM

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Chapter 21 - Cost-Volume-Profit Analysis 162. What was Rusty Co.’s sales mix last year? a. 58% X, 42% Y b. 60% X, 40% Y c. 30% X, 70% Y d. 12.5% X, 87.5% Y ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rusty Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 163. What was Rusty Co.’s unit variable cost of the overall product E? a. $52.50 b. $70.00 c. $120.00 d. $50.00 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rusty Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 164. What was Rusty Co.’s weighted average unit contribution margin? a. $60.00 b. $20.00 c. $40.00 d. $22.50 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rusty Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 165. Assuming that last year’s fixed costs totaled $675,000, what was Rusty Co.’s break-even point in units? a. 16,875 units b. 30,100 units c. 30,000 units d. 11,250 units ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rusty Co. LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:19 PM

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Chapter 21 - Cost-Volume-Profit Analysis 166. Beemer's sales are $400,000, variable costs are 75% of sales, and operating income is $50,000. The operating leverage is a. 2.5 b. 7.5 c. 2.0 d. 0 ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 167. When units manufactured exceed units sold, variable costing income a. equals absorption costing income b. is less than absorption costing income c. is greater than absorption costing income d. is greater by the number of units produced multiplied by the variable cost ratio ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Understanding Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:38 AM

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Chapter 21 - Cost-Volume-Profit Analysis Use this information for Timmer Corporation to answer the questions that follow. Timmer Corporation just started business in January. There were no beginning inventories. During the year, it manufactured 12,000 units of product and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000, and fixed selling and administrative costs were $6,000. 168. What would Timmer's net income be for the year using absorption costing? a. $114,000 b. $110,000 c. $4,000 d. $106,000 ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Timmer Corporation LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.10 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 169. What would Timmer's net income be for the year using variable costing? a. $114,000 b. $110,000 c. $4,000 d. $106,000 ANSWER: POINTS: DIFFICULTY:

b 1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Timmer Corporation LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.10 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 170. What would be the difference in Timmer’s net income for the year if it used variable costing instead of absorption costing? a. no difference b. $2,000 greater c. $4,000 less d. $6,000 less ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Timmer Corporation LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.IMA.09 - Performance Measurement ACCT.IMA.10 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM Matching Copyright Cengage Learning. Powered by Cognero.

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Chapter 21 - Cost-Volume-Profit Analysis Match the following terms with their definitions. a. Relevant range b. Break-even point c. Contribution margin d. Fixed costs e. Variable costs DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCT.WARD.18.21-02 - 21-02 ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:22 PM 171. Vary in proportion to changes in activity levels ANSWER: e POINTS: 1 172. Remain the same in total dollar amount as the level of activity changes ANSWER: d POINTS: 1 173. Where a business’s revenues exactly equal costs ANSWER: b POINTS: 1 174. A specific activity range over which the cost changes are of interest ANSWER: a POINTS: 1 175. The excess of sales revenues over variable costs ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21 - Cost-Volume-Profit Analysis Match the following terms (a–e) with their definitions. a. Profit-volume chart b. Cost-volume-profit chart c. Sales mix d. Operating leverage e. Margin of safety DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-04 - 21-04 ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:23 PM 176. Indicates the possible decrease in sales that may occur before operating loss results ANSWER: e POINTS: 1 177. Contribution margin divided by income from operations ANSWER: d POINTS: 1 178. Graphically shows costs, sales, and operating profit or loss at various levels of units sold ANSWER: b POINTS: 1 179. Plots only the difference between total sales and total costs ANSWER: a POINTS: 1 180. The relative distribution of sales among products sold by a company ANSWER: c POINTS: 1

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Chapter 21 - Cost-Volume-Profit Analysis Subjective Short Answer 181. The manufacturing costs of Mocha Industries for three months of the year are provided below.

April May June

Total Cost $ 63,100 80,740 100,900

Production 1,100 units 1,800 2,600

Using the high-low method, determine the (a) variable cost per unit and (b) the total fixed costs. If required, round answer to the nearest cent. ANSWER:

(a) ($100,900 – $63,100)/(2,600 – 1,100) = $25.20 per unit

(b) $100,900 – ($25.20 × 2,600) = $35,380 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:24 PM

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Chapter 21 - Cost-Volume-Profit Analysis 182. Blane Company has the following data: Total sales Total variable costs Fixed costs Units sold

$800,000 $300,000 $200,000 50,000 units

What will operating income be if units sold double to 100,000 units? Total sales $1,600,000 Total variable costs 600,000 Contribution margin $1,000,000 Fixed costs 200,000 Operating income $ 800,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM ANSWER:

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Chapter 21 - Cost-Volume-Profit Analysis 183. Global Publishers has collected the following data for recent months: Month March April May June

Issues Published 20,500 21,800 17,750 21,200

Total Cost $21,190 22,464 18,495 21,876

Required (a) Using the high-low method, find the variable cost per unit and total fixed costs. (b) What is the estimated cost for a month in which 19,000 issues are published? If required, round answer to the nearest cent. ANSWER: (a) Variable Cost per Unit = ($22,464 – $18,495)/(21,800 – 17,750) = $0.98 per unit Total Fixed Costs = $18,495 – (17,750 × $0.98) = $1,100 Total Cost = $1,100 + ($0.98 × Number of Issues Published) (b) Total Cost = $1,100 + ($0.98 × 19,000) = $19,720 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:25 PM

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Chapter 21 - Cost-Volume-Profit Analysis 184. The following is a list of various costs of producing T-shirts. Classify each cost as either a variable, fixed, or mixed cost for units produced and sold. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)

Ink used for screen printing Warehouse rent of $8,000 per month plus $0.50 per square foot of storage used Thread Electricity costs of $0.038 per kilowatt-hour Janitorial costs of $4,000 per month Advertising costs of $12,000 per month Accounting salaries Color dyes for producing different colors of T-shirts Salary of the production supervisor Straight-line depreciation on sewing machines Salaries of internal pattern designers Hourly wages of sewing machine operators Property taxes on factory, building, and equipment Cotton and polyester cloth Maintenance costs with sewing machine company (The cost is $2,000 per year plus $0.001 for each machine hour of use.)

(a) variable (i) fixed (b) mixed (j) fixed (c) variable (k) fixed (d) variable (l) variable (e) fixed (m) fixed (f) fixed (n) variable (g) fixed (o) mixed (h) variable POINTS: 1 DIFFICULTY: Bloom's: Understanding Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:26 PM ANSWER:

185. The cost graphs below show various types of cost behaviors.

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Chapter 21 - Cost-Volume-Profit Analysis

For each of the following costs, identify the cost graph that best describes its cost behavior as the number of units produced and sold increases: (a) (b) (c) (d) (e)

Sales commissions of $6,000 plus $0.05 for each item sold Rent on warehouse of $12,000 per month Insurance costs of $2,500 per month Per-unit cost of direct labor Total salaries of quality control supervisors (One supervisor must be added for each additional work shift.) (f) Total employer pension costs of $0.35 per direct labor hour (g) Per-unit straight-line depreciation costs (h) Per-unit cost of direct materials (i) Total direct materials cost (j) Electricity costs of $5,000 per month plus $0.0004 per kilowatt-hour (k) Per-unit cost of plant superintendent's salary (l) Salary of the night-time security guard of $3,800 per month (m) Repairs and maintenance costs of $3,000 for each 2,000 hours of factory machine usage (n) Total direct labor cost (o) Straight-line depreciation on factory equipment

ANSWER:

(a) (b) (c) (d) (e) (f) (g) (h)

Graph 2 3 3 3 5 1 4 3

Graph (i) 1 (j) 2 (k) 4 (l) 3 (m) 5 (n) 1 (o) 3 Page 109

Chapter 21 - Cost-Volume-Profit Analysis

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:39 AM 186. Consider the following information: Variable cost per unit = $5 July fixed cost per unit = $7 Units sold and produced in July = 28,000 What is the total estimated cost for August if 30,000 units are projected to be produced and sold? ANSWER:

Total Fixed Costs = $7 × 28,000 = $196,000

Total Cost (at 30,000 units) = $196,000 + ($5 × 30,000 units) = $346,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:30 PM

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Chapter 21 - Cost-Volume-Profit Analysis 187. Copper Hill Inc. manufactures laser printers within a relevant range of production of 70,000 to 100,000 printers per year. The following partially completed manufacturing cost schedule has been prepared: Number of Printers Produced 70,000 90,000 100,000 Total costs: Total variable costs Total fixed costs Total costs Cost per unit: Variable cost per unit Fixed cost per unit Total cost per unit

$350,000 630,000 $980,000

(d) (e) (f)

(j) (k) (l)

(a) (b) (c)

(g) (h) (i)

(m) (n) (o)

Complete the preceding cost schedule, identifying each cost by the appropriate letter (a–o). (a) $5.00 ($350,000/70,000 printers) (b) $9.00 ($630,000/70,000 printers) (c) $14.00 ($980,000/70,000 printers) (d) $450,000 ($5.00 × 90,000 printers) (e) $630,000 (f) $1,080,000 ($450,000 + $630,000) (g) $5.00 (h) $7.00 ($630,000/90,000 printers) (i) $12.00 ($1,080,000/90,000 printers) (j) $500,000 ($5.00 × 100,000 printers) (k) $630,000 (l) $1,130,000 ($500,000 + $630,000) (m) $5.00 (n) $6.30 ($630,000/100,000 units) (o) $11.30 ($1,130,000/100,000 units) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:40 AM ANSWER:

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Chapter 21 - Cost-Volume-Profit Analysis 188. The manufacturing cost of Carrie Industries for the first three months of the year are provided below.

January February March

Total Cost $ 91,500 115,500 79,500

Production 2,300 units 3,100 1,900

Using the high-low method, determine the (a) variable cost per unit and (b) the total fixed cost. If required, round answer to the nearest cent. ANSWER:

(a) ($115,500 – $79,500)/(3,100 – 1,900) = $30 per unit

(b) $115,500 – ($30 × 3,100) = $22,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-01 - 21-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.28 - Variable and Fixed Costs ACCT.IMA.07 - Cost Management ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:31 PM

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Chapter 21 - Cost-Volume-Profit Analysis 189. Bluegill Company sells 45,000 units at $18 per unit. Fixed costs are $62,000, and income from operations is $298,000. Determine the (a) variable cost per unit, (b) unit contribution margin, and (c) contribution margin ratio. ANSWER:

a. Sales Variable costs Contribution margin Fixed costs Income from operations

$810,000 450,000 $360,000 62,000 $298,000

(45,000 units × $18) (45,000 units × $10) (45,000 units × $8)

Variable cost per unit is $10 b. $18 – $10 = $8 per unit c. $8/$18 = 44.44% POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:32 PM

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Chapter 21 - Cost-Volume-Profit Analysis 190. (a) If Swannanoa Company's budgeted sales are $1,000,000, fixed costs are $350,000, and variable costs are $600,000, what is the budgeted contribution margin ratio? (b) If the contribution margin ratio is 30%, sales are $900,000, and fixed costs are $200,000, what is the operating income? (a)

Contribution Margin Ratio = $1,000,000 –$600,000 = $400,000 $400,000/$1,000,000 = 40%

(b)

$900,000 ×30% = $270,000 total contribution margin $270,000 –$200,000 = $70,000 operating income

ANSWER:

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 3/8/2017 11:54 AM DATE MODIFIED: 3/8/2017 12:04 PM

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Chapter 21 - Cost-Volume-Profit Analysis 191. Penny Company sells 25,000 units at $59 per unit. Variable costs are $29 per unit, and loss from operations is $(50,000). Determine the (a) unit contribution margin (b) contribution margin ratio, and (c) fixed costs per unit at production of 25,000 units. If required, round to two decimal places. ANSWER:

a. $59 – $29 = $30 per unit b. $30/$59 = 50.8% c. Sales Variable costs Contribution margin Fixed costs Income from operations

$1,475,000 725,000 $750,000 800,000 $ (50,000)

(25,000 units × $59) (25,000 units × $29) (25,000 units × $30)

$800,000/25,000 = $32 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 192. Consider the following: Variable cost as a percentage of sales = 60% Unit variable cost = $30 Fixed costs = $200,000 What is the break-even point in units? If required, round answer to nearest whole number. ANSWER:

$30/60% = $50 selling price If variable cost as a percentage of sales is 60%, then the contribution margin ratio is 40%. Unit Contribution Margin = 40% × $50 = $20

Break-Even Point (in units) = $200,000/$20 = 10,000 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-02 - 21-02 ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:34 PM

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Chapter 21 - Cost-Volume-Profit Analysis 193. Gladstorm Enterprises sells a product for $60 per unit. The variable cost is $20 per unit, while fixed costs are $85,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $80 per unit. Round your answer to the nearest whole number. ANSWER:

a. SP $60 – VC $20 = CM $40 $85,000/$40 = 2,125 units

b. SP $80 – VC $20 = CM $60 $85,000/$60 = 1,417 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:35 PM 194. Mia Enterprises sells a product for $90 per unit. The variable cost is $40 per unit, while fixed costs are $75,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $100 per unit. If required, round answer to nearest whole number. ANSWER:

a. SP $90 – VC $40 = CM $50 per unit $75,000/$50 = 1,500 units

b. SP $100 – VC $40 = CM $60 per unit $75,000/$60 = 1,250 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:35 PM

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Chapter 21 - Cost-Volume-Profit Analysis 195. Atlantic Company sells a product with a break-even point of 3,000 sales units. The variable cost is $60 per unit, and fixed costs are $270,000. Determine the (a) unit sales price and (b) break-even point in sales units if the company desires a target profit of $36,000. If required, round answer to nearest whole number. ANSWER:

a. $270,000/($X – $60)3,000 units X = $150

b. ($270,000 + $36,000)/($150 – $60) = 3,400 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:43 AM 196. Douglas Company has a contribution margin ratio of 30%. If Douglas has $336,420 in fixed costs, what amount of sales will need to be generated in order for the company to break even? ANSWER: $336,420/0.30 = $1,121,400 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 197. Waterfall Company sells a product for $150 per unit. The variable cost is $80 per unit, and fixed costs are $270,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the company desires a target profit of $36,000. Round answer to the nearest whole number. ANSWER:

a. $150 – $80 = $70 $270,000/$70 = 3,857 units

b. ($270,000 + $36,000)/$70 = 4,371 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 1:38 PM

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Chapter 21 - Cost-Volume-Profit Analysis 198. For the current year ending January 31, Harp Company expects fixed costs of $188,500 and a unit variable cost of $51.50. For the coming year, a new wage contract will increase the unit variable cost to $55.50. The selling price of $70.00 per unit is expected to remain the same. (a) (b)

Compute the break-even sales (units) for the current year. Round answer to the nearest whole number. Compute the anticipated break-even sales (units) for the coming year, assuming the new wage contract is signed.

ANSWER:

(a)

$188,500/($70.00 – $51.50) = 10,189 units

(b) $188,500/($70.00 – $55.50) = 13,000 units POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:10 PM

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Chapter 21 - Cost-Volume-Profit Analysis 199. Carrolton, Inc. currently sells widgets for $80 per unit. The variable cost is $30 per unit, and total fixed costs equal $240,000 per year. Sales are currently 20,000 units annually. The company is considering a 20% drop in selling price that it believes will raise units sold by 20%. Assuming all costs stay the same, what is the impact on income if this change is made? ANSWER:

Current Scenario: SP VC CM

$80 30 $50 × 20,000 units = $1,000,000 total contribution margin

Proposed Change: SP $80 × 80% = $64 VC 30 CM $34 × (20,000 × 1.2) = $816,000 total contribution margin Total CM (and income) drops by $184,000 ($1,000,000 – $816,000). POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:44 AM

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Chapter 21 - Cost-Volume-Profit Analysis 200. Louis Company sells a single product at a price of $65 per unit. Variable costs per unit are $45, and total fixed costs are $625,500. Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000, but decrease the variable costs per unit to $42. Required If Louis Company expects to sell 44,000 units next year, should it purchase this new equipment? ANSWER: Under the current system, Louis’s profit when 44,000 units are sold is [($65 – $45) × 44,000] – $625,500 = $254,500. If the new equipment is purchased, Louis’s profit when 44,000 units are sold is [($65 – $42) × 44,000] – $800,000 = $212,000. Louis is better off not buying the new equipment. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:11 PM

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Chapter 21 - Cost-Volume-Profit Analysis 201. For the current year ending April 30, Hal Company expects fixed costs of $60,000, a unit variable cost of $70, and anticipated break-even of 1,715 sales units. (a) Compute the unit sales price. (b) Compute the sales (units) required to realize an operating profit of $8,000. Round answer to the nearest whole number. ANSWER:

(a)

$60,000/($X – $70) = 1,715 units X = $105

(b) ($60,000 + $8,000)/($105 – $70) = 1,943 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:12 PM

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Chapter 21 - Cost-Volume-Profit Analysis 202. Currently, the unit selling price is $50, the variable cost is $34, and the total fixed costs are $108,000. A proposal is being evaluated to increase the selling price to $54. (a) (b)

Compute the current break-even sales (units). Compute the anticipated break-even sales (units), assuming that the unit selling price is increased and all costs remain constant.

ANSWER:

(a)

$108,000/($50 – $34) = 6,750 units

(b) $108,000/($54 – $34) = 5,400 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:12 PM 203. Perfect Stampers makes and sells aftermarket hub caps. The variable cost for each hub cap is $4.75, and the hub cap sells for $9.95. Perfect Stampers has fixed costs per month of $3,120. Compute the contribution margin per unit and break-even sales in units and in dollars for the month. ANSWER:

Contribution margin: $9.95 selling price – $4.75 variable cost = $5.20 Break-even sales in units: $3,120/$5.20 = 600 units

Break-even sales in dollars: $9.95 selling price × 600 units = $5,970 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:13 PM

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Chapter 21 - Cost-Volume-Profit Analysis 204. For the past year, Iris Company had fixed costs of $6,708,000, a unit variable cost of $444, and a unit selling price of $600. For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs by $6 per unit. Determine the break-even sales (units) for (a) the past year and (b) the coming year. ANSWER:

(a)

$6,708,000/$156 = 43,000 units

(b) $6,708,000/$150 = 44,720 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 205. For the past year, Pedi Company had fixed costs of $70,000, unit variable costs of $32, and a unit selling price of $40. For the coming year, no changes are expected in revenues and costs, except that property taxes are expected to increase by $10,000. Determine the break-even sales (units) for (a) the past year and (b) the coming year. ANSWER:

(a)

$70,000/$8 = 8,750 units

(b) $80,000/$8 = 10,000 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 206. For the coming year, River Company estimates fixed costs at $109,000, the unit variable cost at $21, and the unit selling price at $85. Determine (a) the break-even point in units of sales, (b) the unit sales required to realize operating income of $150,000 and (c) the probable operating income if sales total $500,000. Round units to the nearest whole number and percentage to one decimal place. ANSWER:

(a) $109,000/($85 – $21) = 1,703 units (b) ($109,000 + $150,000)/$64 = 4,047 units (c)

CM Ratio = $64/$85 = 75.3% $500,000 × 75.3% = $376,500 contribution margin – $109,000 fixed costs = $267,500 operating income

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:14 PM

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Chapter 21 - Cost-Volume-Profit Analysis 207. Racer Industries has fixed costs of $900,000. Selling price per unit is $250, and variable cost per unit is $130. Required (a) How many units must Racer sell in order to break even? (b) How many units must Racer sell in order to earn a profit of $480,000? (c) A new employee suggests that Racer Industries sponsor a 10K marathon as a form of advertising. The cost to sponsor the event is $7,200. How many more units must be sold to cover this cost? ANSWER: (a) $900,000/($250 – $130) = 7,500 units (b) ($900,000 + $480,000)/($250 – $130) = 11,500 units (c) $7,200/($250 – $130) = 60 units POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:15 PM

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Chapter 21 - Cost-Volume-Profit Analysis

208. A company with a break-even point at $900,000 in sales revenue had fixed costs of $225,000. When actual sales were (a) the margin of safety expressed in dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution m ANSWER:

(a) $1,000,000 – $900,000 = $100,000 (b) $100,000/$1,000,000 = 10% (c) Contribution Margin Ratio = ($1,000,000 – $750,000)/$1,000,000 = 25% (d) $1,000,000 – $225,000 – $750,000 = $25,000 or $100,000 × 25% = $25,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32-Margin of sa ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:45 AM

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Chapter 21 - Cost-Volume-Profit Analysis 209. A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000. (a) (b) (c)

What is the break-even point in sales dollars? What is the operating income? If neither the relationship between variable costs and sales nor the amount of fixed costs is expected to change in the next year, how much additional operating income can be earned by increasing sales by $110,000?

ANSWER:

(a) Margin of Safety = $1,000,000 × 25% = $250,000 Break-Even Point = $1,000,000 – $250,000 = $750,000 (b) $250,000 (margin of safety) × 30% (contribution margin ratio) = $75,000 (c) $110,000 × 30% = $33,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-03 - 21-03 ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:18 PM

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Chapter 21 - Cost-Volume-Profit Analysis 210. Bobby Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are provided below.

Product X Y

Selling Price per Unit $180 100

Variable Cost per Unit $100 60

Contribution Margin per Unit $80 40

The sales mix for products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. If required, round answer to nearest whole number. ANSWER:

Unit Contribution Margin of Sales Mix = $64 [($80 × 60%) + ($40 × 40%)]

Break-Even Sales (units) = 2,500 ($160,000/$64) 2,500 × 60% = 1,500 units of X 2,500 × 40% = 1,000 units of Y POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:19 PM

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Chapter 21 - Cost-Volume-Profit Analysis 211. Steven Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are provided below.

Product X Y

Selling Price per Unit Variable Cost per Unit $180 $80 100 50

Contribution Margin per Unit $100 50

The sales mix for products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. If required, round answer to nearest whole number. ANSWER:

Unit Selling Price of Sales Mix = $148 ($180 × 60%) + ($100 × 40%) Unit Variable Cost of Sales Mix = $68 ($80 × 60%) + ($50 × 40%) Unit Contribution Margin of Sales Mix = $80 ($148 – $68)

Break-Even Sales (units) = 2,000 ($160,000/$80) 2,000 × 60% = 1,200 units of X 2,000 × 40% = 800 units of Y POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:45 AM

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Chapter 21 - Cost-Volume-Profit Analysis 212. Klein Company reports the following data: Sales Variable costs Fixed costs

$980,000 500,000 350,000

Determine Klein Company’s operating leverage. Round answer to the nearest cent. ANSWER: POINTS: DIFFICULTY:

($980,000 – $500,000)/($980,000 – $500,000 – $350,000) = $3.69 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:20 PM 213. Tom Company reports the following data: Sales $600,000 Variable costs 400,000 Fixed costs 100,000 Determine Tom Company’s operating leverage. If required, round answer to nearest whole number. ANSWER: POINTS: DIFFICULTY:

($600,000 – $400,000)/($600,000 – $400,000 – $100,000) = 2 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:21 PM

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Chapter 21 - Cost-Volume-Profit Analysis 214. Dean Company has sales of $500,000, and the break-even point in sales dollars is $300,000. Determine the company’s margin of safety percentage. If required, round answer to nearest whole number. ANSWER: POINTS: DIFFICULTY:

40% ($500,000 – $300,000)/$500,000 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:22 PM 215. Grant Company has sales of $300,000, and the break-even point in sales dollars is $225,000. Determine the company’s margin of safety percentage. If required, round answer to nearest whole number. ANSWER: POINTS: DIFFICULTY:

25% ($300,000 – $225,000)/$300,000 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:23 PM

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Chapter 21 - Cost-Volume-Profit Analysis 216. Trail Bikes, Inc. sells three Deluxe bikes for every seven Standard bikes. The Deluxe bike sells for $1,800 and has variable costs of $1,200. The Standard bike sells for $600 and has variable costs of $200. Required (a) If Trail Bikes has fixed costs that total $1,702,000, how many bikes must be sold in order for the company to break even? (b) How many of these bikes will be Deluxe bikes, and how many will be Standard bikes? ANSWER: (a) Weighted Average Contribution Margin = {[3 × ($1,800 – $1,200)] + [7 × ($600 – $200)]}/10 = $460 Break-Even Point = $1,702,000/$460 = 3,700 bikes (b) 30% Deluxe = 1,110 70% Standard = 2,590 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:46 AM

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Chapter 21 - Cost-Volume-Profit Analysis 217. If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,200,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales? ANSWER: Margin of Safety = (Sales – Sales at Break-Even)/Sales ($6,000,000 – $4,200,000)/$6,000,000 = 30% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.32 - Margin of safety/sales target ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:25 PM

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Chapter 21 - Cost-Volume-Profit Analysis 218. Safari Co. sells two products, orks and zins. Last year, Safari sold 21,000 units of orks and 14,000 units of zins. Related data are as follows:

Product Orks Zins

Unit Selling Price $120 80

Unit Variable Cost $80 60

Unit Contribution Margin $40 20

Calculate the following: a. Safari Co.’s sales mix b. Safari Co.’s unit selling price of E c. Safari Co.’s unit contribution margin of E d. Safari Co.’s break-even point assuming that last year’s fixed costs were $160,000 ANSWER:

a. Orks: 21,000/(21,000 + 14,000) = 60% Zins: 14,000/(21,000 + 14,000) = 40% b. ($120 × 60%) + ($80 × 40%) = $104 c. [($120 – $80) × 60%] + [($80 – $60) × 40%] = $32

d. $160,000/$32 = 5,000 units of E POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 STATE STANDARDS: United States - OH - ACBSP: APC-32-Margin of safety/s - ACBSP: APC-32Margin of safety/sales ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:27 PM

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Chapter 21 - Cost-Volume-Profit Analysis 219. A business had a margin of safety ratio of 20%, variable costs of 75% of sales, fixed costs of $240,000, a breakeven point of $960,000, and operating income of $60,000 for the current year. Calculate the current year's sales. ANSWER: $960,000/80% = $1,200,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 220. Cordell, Inc. has an operating leverage of 3. Sales are expected to increase by 9% next year. What is the expected change in operating income next year? ANSWER:

If sales increase 9% and the operating leverage is 3, operating income is expected to increase by 27% (9% × 3). POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 221. Silver River Company sells products S and T and has made the following estimates for the coming year: Product S T

Unit Selling Price $30 70

Unit Variable Cost $24 56

Sales Mix 60% 40

Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $119,600 for the coming year. If required, round interim calculations to two decimal places. ANSWER:

(a) Unit Selling Price = ($30 × 60%) + ($70 × 40%) = $46.00 Unit Variable Cost = ($24 × 60%) + ($56 × 40%) = $36.80 Unit Contribution Margin = $46.00 – $36.80 = $9.20 $202,400/$9.20 = 22,000 overall units (b) S: 13,200 units (22,000 units × 60%) T: 8,800 units (22,000 units × 40%) (c) Sales = ($202,400 + $119,600)/$9.20 = 35,000 units

POINTS: DIFFICULTY:

1 Bloom's: Applying Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.31 - Break-even point ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:29 PM

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Chapter 21 - Cost-Volume-Profit Analysis 222. Define operating leverage. Explain the relationship between a company’s operating leverage and how a change in sales is expected to impact profits. ANSWER:

Operating leverage is the relationship between a company’s contribution margin and its income from operations. Companies with a high level of fixed costs have a high operating leverage, and companies with low fixed costs have a low operating leverage.

To calculate how a change in sales will impact profits, multiply the anticipated change in sales by the operating leverage. Thus, the higher a company’s operating leverage, the larger the anticipated increase in profits from a change in sales. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-05 - 21-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.14 - Decision Analysis DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:30 PM 223. The following data are available from the accounting records of Willow Creek Co. for the month ended May 31. During the accounting period, 17,000 units were manufactured and sold at a price of $60 per unit. There were no beginning inventories, and all units were completed (no work in process).

Cost Manufacturing costs: Variable Fixed Total

Total Cost

Number of Units

Unit Cost

$442,000 170,000 $612,000

17,000 17,000

$26 10 $36

Selling and administrative expenses: Variable ($2 per unit sold) Fixed Total (a) (b)

$34,000 32,000 $66,000

Prepare a variable costing income statement. Prepare an absorption costing income statement.

ANSWER:

(a) Willow Creek Co. Variable Costing Income Statement For the Month Ended May 31 Sales (17,000 × $60) Variable cost of goods sold (17,000 × $26) Manufacturing margin Variable selling and administrative expenses

$1,020,000 442,000 $578,000 34,000 Page 139

Chapter 21 - Cost-Volume-Profit Analysis Contribution margin Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Income from operations

$544,000 $170,000 32,000

202,000 $342,000

(b) Willow Creek Co. Absorption Costing Income Statement For the Month Ended May 31 Sales (17,000 × $60) $1,020,000 Cost of goods sold 612,000 Gross profit $408,000 Selling and administrative expenses 66,000 Income from operations $342,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.10 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM

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Chapter 21 - Cost-Volume-Profit Analysis 224. Explain how variable costing net income will be different than absorption costing net income under the following situations: (1) A company had no beginning or ending inventory. During the year, it produced and sold 10,000 units. (2) A company had no beginning inventory. During the year, it produced 10,000 units and sold 8,000 units. (3) A company had 2,000 units in beginning inventory. During the year, it produced 10,000 units and sold 12,000 units. ANSWER:

(1) When there are no inventories (everything that is produced is sold) then variable costing income = absorption costing income. (2) When the units produced > units sold, variable costing income < absorption costing income.

(3) When the units produced < units sold, variable costing income > absorption costing income. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 11:36 AM 225. Roller Paint Co. reported the following data for the month of September. There were no beginning inventories and all units were completed (no work in process). Number of Units

Total Cost Manufacturing costs: Variable Fixed Total Selling and administrative expenses: Variable Fixed

$465,000 210,000 $675,000

30,000 30,000

Unit Cost $15.50 7.00 $22.50

$2.00 per unit sold $39,000

In the month of September, 28,000 of the 30,000 units manufactured were sold at a price of $80.00 per unit. (a) Prepare a variable costing income statement. Copyright Cengage Learning. Powered by Cognero.

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Chapter 21 - Cost-Volume-Profit Analysis (b) (c)

Prepare an absorption costing income statement. Briefly explain why there is a difference in income from operations between the two methods.

ANSWER:

(a) Roller Paint Co. Variable Costing Income Statement For the Month Ended September 30 Sales (28,000 × $80.00) Variable cost of goods sold: Variable cost of goods manufactured (30,000 × $15.50) $465,000 Less ending inventory (2,000 × $15.50) 31,000 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses (28,000 × $2.00) Contribution margin Fixed costs: Fixed manufacturing costs $210,000 Fixed selling and administrative expenses 39,000 Income from operations

$2,240,000

434,000 $1,806,000 56,000 $1,750,000

249,000 $1,501,000

(b) Roller Paint Co. Absorption Costing Income Statement For the Month Ended September 30 Sales (28,000 × $80.00) $2,240,000 Cost of goods sold: Cost of goods manufactured (30,000 × $22.50) $675,000 Less ending inventory (2,000 × $22.50) 45,000 Cost of goods sold 630,000 Gross profit $1,610,000 Selling and administrative expenses [(28,000 × $2.00) + $39,000] 95,000 Income from operations $1,515,000

POINTS:

(c) The difference of $14,000 in the amount of income from operations is due to the different treatment of fixed manufacturing expenses. The entire amount of the fixed manufacturing costs is included as an expense of the period in the variable costing statement. The ending inventory in the absorption costing statement includes $14,000 (2,000 × $7.00) of fixed manufacturing costs. This $14,000, by being included in inventory, is thus excluded from the current cost of goods sold and deferred to another period. 1

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Chapter 21 - Cost-Volume-Profit Analysis DIFFICULTY:

Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.21-APP - 21-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.29 - CVP Analysis ACCT.IMA.09 - Performance Measurement ACCT.IMA.10 - Reporting BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/2/2017 3:34 PM

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Chapter 22 - Budgeting True / False 1. The task of preparing a budget should be the sole task of the most important department in an organization. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 2. A formal written statement of management's plans for the future, expressed in financial terms, is called a budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 22 - Budgeting 3. Budgets are normally used only by profit-making businesses. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 4. The objectives of budgeting are (1) establishing specific goals for future operations, (2) executing plans to achieve the goals, and (3) periodically comparing actual results with these goals. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 22 - Budgeting 5. When budget goals are set too tight, the budget becomes less effective as a tool for planning and controlling operations. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 6. Employees view budgeting more positively when goals are established for them by senior management. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 22 - Budgeting 7. Budgetary slack can be avoided if lower and mid-level managers are requested to support all of their spending requirements with specific operational plans. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 8. Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 22 - Budgeting 9. Consulting the persons affected by a budget when it is prepared can provide an effective means of motivation and cooperation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 10. A budget can be an effective means of communicating management’s plans to the owners of a business. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 22 - Budgeting 11. Budget preparation is best determined in a top-down managerial approach. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 12. Past performance is the best overall basis for evaluating current performance and assessing the need for corrective action. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 22 - Budgeting 13. The responsibility for coordinating the preparation of a master budget should be assigned to the CEO of a firm. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 14. The financial budgets of a business include the cash budget, the budgeted income statement, and the budgeted balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

Page 7

Chapter 22 - Budgeting 15. Part of the cash budget is based on information drawn from the capital expenditures budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 16. The sales budget is derived from the production budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 17. A capital expenditures budget is prepared before the operating budgets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 18. The budgeting process is used to effectively communicate planned expectations regarding profits and expenses to the entire organization. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 19. The budget procedures used by a large manufacturer of automobiles would probably not differ from those used by a small manufacturer of paper products. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 20. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called continuous budgeting. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 21. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called master budgeting. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 5:54 PM 22. The budget procedure that requires all levels of management to start from zero in estimating sales, production, and other operating data is called zero-based budgeting. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 23. The budget procedure that requires all levels of management to start from zero in estimating sales, production, and other operating data is called continuous budgeting. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 24. Budgets are prepared in the Accounting Department and monitored by various department managers. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 25. Once a static budget has been determined, it is changed regularly as the underlying activity changes. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 26. The flexible budget is, in effect, a series of static budgets for different levels of activity. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 22 - Budgeting 27. Flexible budgeting requires all levels of management to start from zero and estimate sales, production, and other operating data as though operations were being started for the first time. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 28. Flexible budgeting builds the effect of changes in level of activity into the budget system. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 22 - Budgeting 29. In preparing flexible budgets, the first step is to identify the fixed and variable components of the various costs and expenses being budgeted. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 30. A process whereby the effect of fluctuations in the level of activity is built into the budgeting system is referred to as flexible budgeting. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 31. The master budget of a small manufacturer would normally include all necessary component budgets except the capital expenditures budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 32. The master budget of a small manufacturer would normally include all necessary component budgets except the budgeted balance sheet. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 33. The master budget of a small manufacturer would normally include all component budgets that impact on the financial statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 34. The first budget to be prepared is usually the sales budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 35. The first budget to be prepared is usually the production budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 36. The first budget to be prepared is usually the cash budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 18

Chapter 22 - Budgeting 37. After the sales budget is prepared, the production budget is normally prepared next. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 38. The master budget is an integrated set of budgets that tie together a company’s operating, financing, and investing activities into an integrated plan for the coming year. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 39. After the sales budget is prepared, the capital expenditures budget is normally prepared next. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 40. The budgeted volume of production is based on the sum of (1) the expected sales volume and (2) the desired ending inventory, less (3) the estimated beginning inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

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Chapter 22 - Budgeting 41. The budgeted volume of production is normally computed as the sum of (1) the expected sales volume and (2) the desired ending inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 42. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 202,000 units. a. True b. False ANSWER:

True

RATIONALE:

Expected units to be sold

200,000

Add: Desired ending inventory

24,000

Total

224,000

Less: Estimated beginning inventory

22,000

Total units to be produced

202,000

POINTS: DIFFICULTY:

Page 21

Chapter 22 - Budgeting 43. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 198,000 units. a. True b. False ANSWER:

False

RATIONALE:

Expected units to be sold

200,000

Add: Desired ending inventory

24,000

Total

224,000

Less: Estimated beginning inventory

22,000

Total units to be produced

202,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 5:57 PM 44. The budgeted direct materials purchases is based on the sum of (1) the materials needed for production and (2) the desired ending materials inventory, less (3) the estimated beginning materials inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 45. The budgeted direct materials purchases is normally computed as the sum of (1) the materials for production and (2) the desired ending inventory. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 46. The production budget is the starting point for preparation of the direct labor cost budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

Page 23

Chapter 22 - Budgeting 47. The sales budget is the starting point for preparation of the direct labor cost budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 48. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead cost budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

Page 24

Chapter 22 - Budgeting 49. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the operating expenses budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 50. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 25

Chapter 22 - Budgeting 51. Detailed supplemental schedules based on department responsibility are often prepared for major items in the operating expenses budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 26

Chapter 22 - Budgeting 53. The cash budget summarizes future plans for acquisition of fixed assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 54. The cash budget is affected by the sales budget, the various budgets for manufacturing costs and operating expenses, and the capital expenditures budget. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 55. The cash budget presents the expected inflow and outflow of cash for a specified period of time. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 56. The budgeted balance sheet assumes that all operating and financing plans are met. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 57. The capital expenditures budget is part of the planned investing activities of a company. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM Multiple Choice 58. A formal written statement of management's plans for the future, expressed in financial terms, is a a. gross profit report b. responsibility report c. budget d. performance report ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

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Chapter 22 - Budgeting 59. The budget process involves doing all of the following except a. establishing specific goals b. executing plans to achieve the goals c. periodically comparing actual results with the goals d. dismissing all managers who fail to achieve operational goals specified in the budget ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 5:58 PM 60. The budgetary unit of an organization that is led by a manager who has both the authority over and responsibility for the unit's performance is known as a a. control center b. budgetary area c. responsibility center d. managerial department ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 61. The benefits of comparing actual performance of the operations against planned goals include all of the following except a. providing prompt feedback to employees about their performance relative to the goal b. preventing unplanned expenditures c. helping to establish spending priorities d. determining how managers are performing against prior years' actual operating results ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 62. Budgeting supports the planning process by encouraging all of the following activities except a. requiring all organizational units to establish their goals for the upcoming period b. increasing the motivation of managers and employees by providing agreed-upon expectations c. directing and coordinating operations during the period d. improving overall decision making by considering all viewpoints, options, and cost-reduction possibilities ANSWER: POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 63. When management seeks to achieve personal departmental objectives that may work to the detriment of the entire company, the manager is experiencing a. budgetary slack b. padding c. goal conflict d. cushions ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 64. The budgeting process does not involve which of the following activities? a. establishment of specific goals b. periodic comparison of actual results to goals c. execution of plans to achieve goals d. increase in sales by increasing marketing efforts ANSWER: POINTS: DIFFICULTY:

Page 32

Chapter 22 - Budgeting 65. Budgets need to be fair and attainable for employees to consider the budget important in their normal daily activities. Which of the following is not considered a human behavior problem? a. setting goals among managers that conflict with one another b. setting goals too tightly making it difficult to meet performance expectations c. allowing employees the opportunity to be a part of the budget process d. allowing goals to be so low that employees develop a “spend it or lose it” attitude ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/7/2017 2:20 PM 66. Which of the following budgets allows for adjustments in activity levels? a. static budget b. continuous budget c. zero-based budget d. flexible budget ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/7/2017 2:02 PM

Page 33

Chapter 22 - Budgeting 67. The process of developing budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as a. flexible budgeting b. continuous budgeting c. zero-based budgeting d. master budgeting ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 68. A variant of fiscal-year budgeting whereby a 12-month projection into the future is maintained at all times is termed a. flexible budgeting b. continuous budgeting c. zero-based budgeting d. master budgeting ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:01 PM

Page 34

Chapter 22 - Budgeting 69. Jase Manufacturing Co.'s static budget for 10,000 units of production includes $40,000 for direct labor and $4,000 for variable electric power. Total fixed costs are $24,000. At 12,000 units of production, a flexible budget would show a. variable costs of $52,800 and $29,000 of fixed costs b. variable costs of $44,000 and $24,000 of fixed costs c. variable costs of $52,800 and $24,000 of fixed costs d. variable and fixed costs totaling $68,000 ANSWER:

RATIONALE:

Direct labor (12,000 × $4* per unit)

$48,000

Electric power (12,000 × $0.4** per unit)

4,800

Total variable cost

$52,800

Total fixed costs

$24,000

*$40,000 ÷ 10,000 units = $4 per unit **$4,000 ÷ 10,000 units = $0.4 per unit POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:02 PM

Page 35

Chapter 22 - Budgeting 70. Miller and Sons' static budget for 10,000 units of production includes $50,000 for direct materials, $44,000 for direct labor, variable utilities of $5,000, and supervisor salaries of $24,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $28,800 c. total variable costs of $148,000 d. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $24,000 ANSWER: RATIONALE:

d Direct Materials = ($50,000 ÷ 10,000 units) × 12,000 units = $60,000 Direct Labor = ($44,000 ÷ 10,000 units) × 12,000 units = $52,800 Variable Utilities = ($5,000 ÷ 10,000 units) × 12,000 units = $6,000 Supervisor Salaries = $24,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:02 PM 71. A disadvantage of static budgets is that they a. are dependent on the previous year's actual results b. cannot be used by service companies c. do not show possible changes in underlying activity levels d. show the expected results of a responsibility center for several levels of activity ANSWER: POINTS: DIFFICULTY:

Page 36

Chapter 22 - Budgeting 72. A series of budgets for varying rates of activity is termed a(n) a. flexible budget b. variable budget c. master budget d. activity budget ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:04 PM

Page 37

Chapter 22 - Budgeting 73. Chelsa Manufacturing Co.'s static budget for 5,000 units of production includes $40,000 for direct labor and $5,000 for variable electric power. Total fixed costs are $23,000. At 8,000 units of production, a flexible budget would show a. variable costs of $64,000 and $28,000 of fixed costs b. variable costs of $64,000 and $23,000 of fixed costs c. variable costs of $72,000 and $23,000 of fixed costs d. variable and fixed costs totaling $107,000 ANSWER:

RATIONALE:

Direct labor (8,000 × $8* per unit) Electric power (8,000 × $1** per unit) Total variable cost Total fixed costs *$40,000 ÷ 5,000 units = $8 per unit **$5,000 ÷ 5,000 units = $1 per unit

$64,000 8,000 $72,000 $23,000

POINTS: DIFFICULTY:

Page 38

Chapter 22 - Budgeting 74. Laurie Inc.’s static budget for 10,000 units of production includes $60,000 for direct materials, $44,000 for direct labor, fixed utilities costs of $5,000, and supervisor salaries of $25,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $72,000, direct labor of $52,800, fixed utilities costs of $5,000, and supervisor salaries of $25,000 c. total variable costs of $159,800 d. direct materials of $60,000, direct labor of $52,800, fixed utilities costs of $6,000, and supervisor salaries of $25,000 ANSWER: RATIONALE:

b Direct Materials = ($60,000 ÷ 10,000 units) × 12,000 units = $72,000 Direct Labor = ($44,000 ÷ 10,000 units) × 12,000 units = $52,800 Fixed Utilities Costs = $5,000 Supervisor Salaries = $25,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:05 PM

Page 39

Chapter 22 - Budgeting 75. The primary difference between a static budget and a flexible budget is that a static budget a. is suitable in a volatile demand situation while a flexible budget is suitable in a stable demand situation b. is concerned only with future acquisitions of fixed assets, whereas a flexible budget is concerned with expenses that vary with sales c. includes only fixed costs, whereas a flexible budget includes only variable costs d. is a plan for a single level of production, whereas a flexible budget can be converted to any level of production ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/10/2017 8:31 AM 76. If budgeted beginning inventory is $8,000, budgeted ending inventory is $9,400, and budgeted cost of goods sold is $10,260, budgeted production should be a. $1,400 b. $9,600 c. $11,660 d. $11,550 ANSWER:

RATIONALE:

Budgeted ending inventory Add: Budgeted cost of goods sold Total Less: Budgeted beginning inventory Budgeted production

$ 9,400 10,260 $19,660 8,000 $11,660

POINTS: DIFFICULTY:

Page 40

Chapter 22 - Budgeting 77. At the beginning of the period, the Cutting Department budgeted direct labor of $155,000, direct materials of $165,000, and fixed factory overhead of $15,000 for 9,000 hours of production. The department actually completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses flexible budgeting? Round hourly rates to two decimal places. a. $416,000 b. $370,500 c. $368,889 d. $335,000 ANSWER:

RATIONALE:

Direct labor (10,000 × $17.22* per hour)

$172,200

Add: Direct materials (10,000 × $18.33** per hour)

183,300

Total variable cost

$355,500

Add: Total fixed cost

15,000

Total budget

$370,500

*$155,000 ÷ 9,000 hours = $17.22 per hour **$165,000 ÷ 9,000 hours = $18.33 per hour POINTS: DIFFICULTY:

Page 41

Chapter 22 - Budgeting 78. At the beginning of the period, the Assembly Department budgeted direct labor of $110,000, direct materials of $170,000, and fixed factory overhead of $28,000 for 8,000 hours of production. The department actually completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses flexible budgeting? Round hourly rates to two decimal places. a. $288,000 b. $305,000 c. $350,000 d. $378,000 ANSWER:

RATIONALE:

Direct labor (10,000 × $13.75* per hour)

$137,500

Add: Direct materials (10,000 × $21.25** per hour)

212,500

Total variable cost

$350,000

Add: Total fixed cost

28,000

Total budget

$378,000

*$110,000 ÷ 8,000 hours = $13.75 per hour **$170,000 ÷ 8,000 hours = $21.25 per hour POINTS: DIFFICULTY:

Page 42

Chapter 22 - Budgeting 79. The production budgets are used to prepare which of the following budgets? a. operating expenses b. direct materials purchases, direct labor cost, and factory overhead cost c. sales in dollars d. sales in units ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 80. Principal components of a master budget include a. production budget b. sales budget c. capital expenditures budget d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:07 PM

Page 43

Chapter 22 - Budgeting 81. The first budget customarily prepared as part of an entity's master budget is the a. production budget b. cash budget c. sales budget d. direct materials purchases budget ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:07 PM

Page 44

Chapter 22 - Budgeting 82. Motorcycle Manufacturers, Inc. projected sales of 78,000 machines for the year. The estimated January 1 inventory is 6,500 units, and the desired December 31 inventory is 6,000 units. What is the budgeted production (in units) for the year? a. 78,500 b. 70,000 c. 77,500 d. 70,500 ANSWER:

RATIONALE:

Projected sales

78,000

Add: Desired ending inventory, Dec. 31

6,000

Total

84,000

Less: Estimated beginning inventory, Jan. 1

6,500

Total units to be produced

77,500

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:08 PM

Page 45

Chapter 22 - Budgeting 83. The operating budgets of a company include the a. cash budget b. capital expenditures budget c. financing budget d. production budget ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-03 - 22-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:09 PM 84. Which of the following budgets is not directly associated with the production budget? a. direct materials purchases budget b. sales budget c. capital expenditures budget d. direct labor cost budget ANSWER: POINTS: DIFFICULTY:

Page 46

Chapter 22 - Budgeting Use the information below for Flushing Company to answer the questions that follow. Below is budgeted production and sales information for Flushing Company for the month of December. Product XXX 32,000 units 34,000 units 320,000 units 180,000 units

Estimated beginning inventory Desired ending inventory Region I, anticipated sales Region II, anticipated sales

Product ZZZ 20,000 units 17,000 units 260,000 units 140,000 units

The unit selling price for product XXX is $5 and for product ZZZ is $15. 85. Budgeted sales for the month are a. $3,180,000 b. $5,820,000 c. $1,800,000 d. $8,500,000 ANSWER:

RATIONALE:

Budgeted Sales = Expected Sales Volume × Expected Unit Sales Price Budgeted sales for Product XXX (320,000 + 180,000) × $5 $2,500,000 Budgeted sales for Product ZZZ (260,000 + 140,000) × $15 6,000,000 Total budgeted sales $8,500,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flushing Company LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:10 PM

Page 47

Chapter 22 - Budgeting 86. Budgeted production for product XXX during the month is a. 498,000 units b. 502,000 units c. 534,000 units d. 566,000 units ANSWER:

RATIONALE:

Anticipated sales (320,000 + 180,000)

500,000

Add: Desired ending inventory

34,000

Total

534,000

Less: Estimated beginning inventory

32,000

Budgeted production

502,000

POINTS: DIFFICULTY:

Page 48

Chapter 22 - Budgeting 87. Budgeted production for product ZZZ during the month is a. 403,000 units b. 380,000 units c. 397,000 units d. 417,000 units ANSWER:

RATIONALE:

Anticipated sales (260,000 + 140,000)

400,000

Add: Desired ending inventory

17,000

Total

417,000

Less: Estimated beginning inventory

20,000

Budgeted production

397,000

POINTS: DIFFICULTY:

Page 49

Chapter 22 - Budgeting 88. For February, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $96,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,500 plus ½ of 1% of sales. Total selling expenses for the month of February are a. $161,000 b. $237,500 c. $235,000 d. $241,000 ANSWER:

RATIONALE:

Sales commission (5% of $700,000)

$ 35,000

Sales manager's salary

96,000

Advertising expenses

90,000

Shipping expenses (2% of $700,000)

14,000

Miscellaneous selling expenses ($2,500 + 0.5% of $700,000)

6,000

Total selling expenses

$241,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:12 PM

Page 50

Chapter 22 - Budgeting 89. For April, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $98,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,100 plus ½ of 1% of sales. Total selling expenses for the month of April are a. $159,100 b. $242,600 c. $186,000 d. $182,100 ANSWER:

RATIONALE:

Sales commission (5% of $700,000)

$ 35,000

Sales manager's salary

98,000

Advertising expenses

90,000

Shipping expenses (2% of $700,000)

14,000

Miscellaneous selling expenses ($2,100 + 0.5% of $700,000)

5,600

Total selling expenses

$242,600

POINTS: DIFFICULTY:

Page 51

Chapter 22 - Budgeting 90. Stephanie Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 108,000 units, and desired ending inventory is 90,000 units. The quantities of direct materials expected to be used for each unit of finished product are given below. Material A: 0.50 lb. per unit @ $0.70 per pound Material B: 1.00 lb. per unit @ $1.70 per pound Material C: 1.20 lb. per unit @ $1.00 per pound The dollar amount of Material A used in production during the year is a. $217,700 b. $528,700 c. $311,000 d. $224,600 ANSWER:

RATIONALE:

Budgeted sales 640,000 Add: Desired ending inventory 90,000 Total 730,000 Less: Estimated beginning inventory 108,000 Total units to be produced 622,000 The dollar amount of Material A used in production during the year = 622,000 × 0.50 × $0.70 = $217,700

POINTS: DIFFICULTY:

Page 52

Chapter 22 - Budgeting 91. For March, sales revenue is $1,000,000, sales commissions are 5% of sales, the sales manager's salary is $80,000, advertising expenses are $65,000, shipping expenses total 1% of sales, and miscellaneous selling expenses are $2,100 plus 1% of sales. Total selling expenses for the month of March are a. $217,100 b. $205,000 c. $207,100 d. $142,100 ANSWER:

RATIONALE:

Sales commission (5% of $1,000,000)

$ 50,000

Sales manager's salary

80,000

Advertising expenses

65,000

Shipping expenses (1% of $1,000,000)

10,000

Miscellaneous selling expenses ($2,100 + 1% of $1,000,000)

12,100

Total selling expenses

$217,100

POINTS: DIFFICULTY:

Page 53

Chapter 22 - Budgeting Use the information below for Mandy Corporation to answer the questions that follow. Mandy Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 98,000 units, and desired ending inventory is 80,000 units. The quantities of direct materials expected to be used for each unit of finished product are given below. Material A: 0.50 lb. per unit @ $0.60 per pound Material B: 1.00 lb. per unit @ $1.70 per pound Material C: 1.20 lb. per unit @ $1.00 per pound 92. The dollar amount of Material B used in production during the year is a. $1,057,400 b. $1,193,400 c. $1,026,800 d. $1,224,000 ANSWER:

RATIONALE:

Budgeted sales 640,000 Add: Desired ending inventory 80,000 Total 720,000 Less: Estimated beginning inventory 98,000 Total units to be produced 622,000 The dollar amount of Material B used in production during the year = 622,000 × 1.00 × $1.70 = $1,057,400

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mandy Corporation LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:14 PM

Page 54

Chapter 22 - Budgeting 93. The dollar amount of Material C used in production during the year is a. $746,400 b. $724,800 c. $824,400 d. $758,160 ANSWER:

RATIONALE:

Budgeted sales 640,000 Add: Desired ending inventory 80,000 Total 720,000 Less: Estimated beginning inventory 98,000 Total units to be produced 622,000 The dollar amount of Material C used in production during the year = 622,000 × 1.20 × $1.00 = $746,400

POINTS: DIFFICULTY:

Page 55

Chapter 22 - Budgeting 94. Production and sales estimates for March for Robin Co. are as follows: Estimated inventory (units), March 1 Desired inventory (units), March 31

18,000 21,600

Expected sales volume (units): Area M Area L Area O Unit sales price

7,000 8,000 9,000 $15

The number of units expected to be manufactured in March is a. 24,000 b. 27,000 c. 27,600 d. 21,600 ANSWER:

RATIONALE:

Expected sales (7,000 + 8,000 + 9,000)

24,000

Add: Desired ending inventory

21,600

Total

45,600

Less: Estimated beginning inventory

18,000

Total units expected to be manufactured

27,600

POINTS: DIFFICULTY:

Page 56

Chapter 22 - Budgeting 95. Production and sales estimates for May for Cardinal Co. are as follows: Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): Area W Area X Area Y Unit sales price

19,500 19,300 6,000 7,000 8,000 $20

The number of units expected to be sold in May is a. 21,000 b. 3,700 c. 22,800 d. 18,300 ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Expected Sales = 6,000 + 7,000 + 8,000 = 21,000 units 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:16 PM

Page 57

Chapter 22 - Budgeting 96. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price

20,000 19,000 7,000 4,000 5,500 $20

The number of units expected to be manufactured in June is a. 11,000 b. 12,500 c. 15,500 d. 13,500 ANSWER:

RATIONALE:

Expected sales (7,000 + 4,000 + 5,500)

16,500

Add: Desired ending inventory

19,000

Total

35,500

Less: Estimated beginning inventory

20,000

Total units expected to be manufactured

15,500

POINTS: DIFFICULTY:

Page 58

Chapter 22 - Budgeting 97. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price

8,000 9,000 4,000 10,000 6,000 $25

The budgeted total sales for June is a. $225,000 b. $500,000 c. $525,000 d. $200,000 ANSWER: RATIONALE:

b Expected Units to Be Sold = 4,000 + 10,000 + 6,000 = 20,000 units Budgeted Sales = 20,000 × $25 = $500,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:18 PM

Page 59

Chapter 22 - Budgeting 98. If the expected sales volume for the current period is 8,000 units, the desired ending inventory is 1,400 units, and the beginning inventory is 1,200 units, the number of units set forth in the production budget, representing total production for the current period, is a. 10,600 b. 8,200 c. 66,000 d. 6,800 ANSWER:

RATIONALE:

Expected sales

8,000

Add: Desired ending inventory

1,400

Total

9,400

Less: Estimated beginning inventory

1,200

Total units to be produced

8,200

POINTS: DIFFICULTY:

Page 60

Chapter 22 - Budgeting Use the information below for August production to answer the questions that follow. Production estimates for August are as follows: Estimated inventory (units), August 1 Desired inventory (units), August 31 Expected sales volume (units), August

12,000 9,000 75,000

For each unit produced, the direct materials requirements are as follows: Material A ($5 per lb.) 3 lb. ½ lb. Material B ($18 per lb.) 99. The number of pounds of Material A and Material B required for August production is a. 216,000 lb. of A; 72,000 lb. of B b. 216,000 lb. of A; 36,000 lb. of B c. 225,000 lb. of A; 37,500 lb. of B d. 234,000 lb. of A; 39,000 lb. of B ANSWER:

RATIONALE:

Expected sales Add: Desired ending inventory Total Less: Estimated beginning inventory Total units to be produced Direct materials requirements Material A: 72,000 × 3 lb. = 216,000 lb. Material B: 72,000 × 0.5 lb. = 36,000 lb.

75,000 9,000 84,000 12,000 72,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: August production LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:19 PM

Page 61

Chapter 22 - Budgeting 100. The total direct materials purchases (assuming no beginning or ending inventory of material) of Material A and Material B required for August production is a. $1,080,000 for A; $1,296,000 for B b. $1,080,000 for A; $648,000 for B c. $1,125,000 for A; $675,000 for B d. $1,170,000 for A; $702,000 for B ANSWER:

RATIONALE:

Direct materials purchases: Material A (216,000 × $5) Material B (36,000 × $18)

$1,080,000 648,000 $1,728,000

POINTS: DIFFICULTY:

Page 62

Chapter 22 - Budgeting 101. Based on the following production and sales estimates for May, determine the number of units expected to be manufactured in May. Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): South region West region North region Unit sales price

30,000 25,000 20,000 40,000 20,000 $10

a. 85,000 b. 80,000 c. 75,000 d. 105,000 ANSWER:

RATIONALE:

Expected sales (20,000 + 40,000 + 20,000)

80,000

Add: Desired ending inventory

25,000

Total

105,000

Less: Estimated beginning inventory

30,000

Total units expected to be manufactured

75,000

POINTS: DIFFICULTY:

Page 63

Chapter 22 - Budgeting 102. Which of the following budgets provides the starting point for the preparation of the direct labor cost budget? a. direct materials purchases budget b. cash budget c. production budget d. sales budget ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM

Page 64

Chapter 22 - Budgeting 103. Production and sales estimates for April are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Area A Area B Area C Unit sales price

19,000 18,000 3,000 4,750 4,250 $20

The number of units expected to be manufactured in April is a. 11,000 b. 9,500 c. 12,000 d. 13,000 ANSWER:

RATIONALE:

Expected sales (3,000 + 4,750 + 4,250)

12,000

Add: Desired ending inventory

18,000

Total

30,000

Less: Estimated beginning inventory

19,000

Total units expected to be manufactured

11,000

POINTS: DIFFICULTY:

Page 65

Chapter 22 - Budgeting 104. Production and sales estimates for April are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Area A Area B Area C Unit sales price

9,000 8,000 3,500 4,750 4,250 $20

The budgeted total sales for April is a. $200,000 b. $230,000 c. $270,000 d. $250,000 ANSWER: RATIONALE:

d Expected Units to Be Sold = 3,500 + 4,750 + 4,250 = 12,500 units Budgeted Sales = 12,500 × $20 = $250,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:28 PM

Page 66

Chapter 22 - Budgeting 105. If the expected sales volume for the current period is 7,000 units, the desired ending inventory is 400 units, and the beginning inventory is 400 units, the number of units set forth in the production budget, representing total production for the current period, is a. 6,700 b. 7,400 c. 7,100 d. 7,000 ANSWER:

RATIONALE:

Expected sales

7,000

Add: Desired ending inventory

400

Total

7,400

Less: Estimated beginning inventory

400

Total units to be produced

7,000

POINTS: DIFFICULTY:

Page 67

Chapter 22 - Budgeting Use the information below for July production to answer the questions that follow. Production estimates for July are as follows: Estimated inventory (units), July 1 Desired inventory (units), July 31 Expected sales volume (units), July

8,500 10,500 76,000

For each unit produced, the direct materials requirements are as follows: 3 lb. Direct material A ($5 per lb.) ½ lb. Direct material B ($18 per lb.) 106. The number of pounds of Material A and Material B required for July production is a. 216,000 lb. of A; 36,000 lb. of B b. 216,000 lb. of A; 72,000 lb. of B c. 234,000 lb. of A; 39,000 lb. of B d. 225,000 lb. of A; 37,500 lb. of B ANSWER:

RATIONALE:

Expected sales Add: Desired ending inventory Total Less: Estimated beginning inventory Total units to be produced Direct materials requirements: Material A: 78,000 × 3 lb. = 234,000 lb. Material B: 78,000 × 0.5 lb. = 39,000 lb.

76,000 10,500 86,500 8,500 78,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: July estimates LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:29 PM

Page 68

Chapter 22 - Budgeting 107. The total direct materials purchases of Material A and Material B (assuming no beginning or ending material inventory) required for July production is a. $1,080,000 for A; $648,000 for B b. $1,080,000 for A; $1,296,000 for B c. $1,170,000 for A; $702,000 for B d. $1,125,000 for A; $675,000 for B ANSWER: RATIONALE:

c Direct materials purchases: Material A: 234,000 × $5 = $1,170,000 Material B: 39,000 × $18 = $702,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: July estimates LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:30 PM

Page 69

Chapter 22 - Budgeting Use the information below for Cardinal Company to answer the questions that follow. Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for the next four months were: January, 200,000 units; February, 180,000 units; March, 210,000 units; and April, 230,000 units. Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of the following month's sales. 108. Determine the budgeted units of production for January. a. 236,000 b. 181,000 c. 200,000 d. 219,000 ANSWER:

RATIONALE:

Expected sales

200,000

Add: Desired ending inventory (20% of 180,000)

36,000

Total

236,000

Less: Beginning inventory

55,000

Total units to be produced

181,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cardinal Company LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:30 PM

Page 70

Chapter 22 - Budgeting 109. Determine the budgeted units of production for February. a. 186,000 b. 181,000 c. 222,000 d. 174,000 ANSWER:

RATIONALE:

Expected sales

180,000

Add: Desired ending inventory (20% of 210,000)

42,000

Total

222,000

Less: Estimated beginning inventory (Ending inventory for January)

36,000

Total units to be produced

186,000

POINTS: DIFFICULTY:

Page 71

Chapter 22 - Budgeting 110. Determine the budgeted units of production for March. a. 256,000 b. 206,000 c. 214,000 d. 298,000 ANSWER:

RATIONALE:

Expected sales

210,000

Add: Desired ending inventory (20% of 230,000)

46,000

Total

256,000

Less: Estimated beginning inventory (20% of $210,000)

42,000

Total units to be produced

214,000

POINTS: DIFFICULTY:

Page 72

Chapter 22 - Budgeting 111. Determine the budgeted units of inventory for March 31. a. 46,000 b. 36,000 c. cannot be determined from the data given d. 42,000 ANSWER: RATIONALE:

a Budgeted Units of Inventory for March 31 = 20% of Expected Sales for April = 0.20 × 230,000 = 46,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cardinal Company LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:32 PM

Page 73

Chapter 22 - Budgeting 112. Willow Valley’s April sales forecast projects that 7,000 units will sell at a price of $10.50 per unit. The desired ending inventory is 30% higher than the beginning inventory, which was 1,000 units. Budgeted production in April would be a. 8,000 units b. 7,000 units c. 7,300 units d. 6,300 units ANSWER:

RATIONALE:

Expected sales

7,000

Add: Desired ending inventory (130% of 1,000)

1,300

Total

8,300

Less: Estimated beginning inventory

1,000

Total units to be produced

7,300

POINTS: DIFFICULTY:

Page 74

Chapter 22 - Budgeting Use the information below for Bluebird Company to answer the questions that follow. Below is the budgeted production and sales information for Bluebird Company for the month of December. Product XXX 30,000 units 32,000 units 520,000 units

Estimated beginning inventory Desired ending inventory Anticipated sales

Product ZZZ 18,000 units 15,000 units 460,000 units

The unit selling price for product XXX is $5 and for product ZZZ is $14. 113. Budgeted production for product XXX during the month is a. 522,000 units b. 552,000 units c. 518,000 units d. 520,000 units ANSWER:

RATIONALE:

Anticipated sales

520,000

Add: Desired ending inventory

32,000

Total

552,000

Less: Estimated beginning inventory

30,000

Budgeted production

522,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Bluebird Company LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:34 PM

Page 75

Chapter 22 - Budgeting 114. Budgeted production for product ZZZ during the month is a. 460,000 units b. 475,000 units c. 457,000 units d. 463,000 units ANSWER:

RATIONALE:

Anticipated sales

460,000

Add: Desired ending inventory

15,000

Total

475,000

Less: Estimated beginning inventory

18,000

Budgeted production

457,000

POINTS: DIFFICULTY:

Page 76

Chapter 22 - Budgeting 115. Truliant Co. sells a product called Withitall and has predicted the following sales for the first four months of the current year:

Sales in units

January 1,700

February 1,900

March 2,100

April 1,600

Ending inventory for each month should be 20% of the next month’s sales. How many units should be produced in February? a. 1,940 b. 1,800 c. 1,900 d. 1,850 ANSWER:

RATIONALE:

Anticipated sales

1,900

Add: Desired ending inventory (20% of 2,100)

420

Total

2,320

Less: Estimated beginning inventory (20% of 1,900)

380

Budgeted production

1,940

POINTS: DIFFICULTY:

Page 77

Chapter 22 - Budgeting 116. An October sales forecast projects that 7,000 units are going to be sold at a price of $11.50 per unit. The desired ending inventory in units is 15% higher than the beginning inventory of 1,000 units. Total October sales are anticipated to be a. $69,000 b. $80,500 c. $70,000 d. $92,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Expected October Sales = 7,000 × $11.50 = $80,500 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:35 PM

Page 78

Chapter 22 - Budgeting 117. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price

16,000 18,000 4,000 6,000 5,500 $20

The number of units expected to be manufactured in June is a. 15,500 b. 17,500 c. 16,500 d. 13,500 ANSWER:

RATIONALE:

Expected sales (4,000 + 6,000 + 5,500)

15,500

Add: Desired ending inventory

18,000

Total

33,500

Less: Estimated beginning inventory

16,000

Total units expected to be manufactured

17,500

POINTS: DIFFICULTY:

Page 79

Chapter 22 - Budgeting Use the information below for Product A and Product B to answer the questions that follow. Next year’s sales forecast shows that 20,000 units of Product A and 22,000 units of Product B are going to be sold for prices of $10 and $12 per unit, respectively. The desired ending inventory of Product A is 20% higher than its beginning inventory of 2,000 units. The beginning inventory of Product B is 2,500 units. The desired ending inventory of Product B is 3,000 units. 118. Total budgeted sales of both products for the year would be a. $42,000 b. $200,000 c. $264,000 d. $464,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Total Budgeted Sales = (20,000 × $10) + (22,000 × $12) = $464,000 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Product A LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:37 PM

Page 80

Chapter 22 - Budgeting 119. Budgeted production of Product A for the year would be a. 22,400 units b. 20,400 units c. 20,000 units d. 12,200 units ANSWER:

RATIONALE:

Expected sales

20,000

Add: Desired ending inventory (120% of 2,000)

2,400

Total

22,400

Less: Estimated beginning inventory

2,000

Total units to be produced

20,400

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Product A LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:37 PM

Page 81

Chapter 22 - Budgeting 120. Budgeted production of Product B for the year would be a. 24,500 units b. 22,500 units c. 26,500 units d. 23,200 units ANSWER:

RATIONALE:

Expected sales

22,000

Add: Desired ending inventory

3,000

Total

25,000

Less: Estimated beginning inventory

2,500

Total units to be produced

22,500

POINTS: DIFFICULTY:

Page 82

Chapter 22 - Budgeting 121. If the expected sales volume for the current period is 9,000 units, the desired ending inventory is 200 units, and the beginning inventory is 300 units, the number of units set forth in the production budget, representing total production for the current period, is a. 9,000 b. 8,900 c. 8,700 d. 9,100 ANSWER:

RATIONALE:

Expected sales

9,000

Add: Desired ending inventory

200

Total

9,200

Less: Estimated beginning inventory

300

Total units to be produced

8,900

POINTS: DIFFICULTY:

Page 83

Chapter 22 - Budgeting 122. Consider Derek's budget information: materials to be used, $64,750; direct labor, $198,400; factory overhead, $394,800; work in process inventory on January 1, $189,100; and work in progress inventory on December 31, $197,600. What is the budgeted cost of goods manufactured for the year? a. $649,450 b. $657,950 c. $197,600 d. $1,044,650 ANSWER:

RATIONALE:

Materials

$ 64,750

Direct labor

198,400

Factory overhead

394,800

Total manufacturing costs

$657,950

Add: Work in process inventory, January 1

189,100 $847,050

Less: Work in process inventory, December 31

197,600

Budgeted cost of goods manufactured for the year

$649,450

POINTS: DIFFICULTY:

Page 84

Chapter 22 - Budgeting 123. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $540,000; and cost of goods sold for the year, $2,560,000. The budgeted cost of goods manufactured for the year is a. $1,255,000 b. $2,335,000 c. $2,785,000 d. $3,100,000 ANSWER:

RATIONALE:

Cost of goods sold for the year Add: Finished goods, December 31 Total Less: Finished goods, January 1 Budgeted cost of goods manufactured for the year

$2,560,000 540,000 $3,100,000 765,000 $2,335,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 2:18 PM

Page 85

Chapter 22 - Budgeting 124. Heedy Company is trying to decide how many units of merchandise to produce each month. The company policy is to have 20% of the next month’s sales in inventory at the end of each month. Projected sales for August, September, and October are 30,000 units, 20,000 units, and 40,000 units, respectively. How many units must be produced in September? a. 24,000 b. 18,000 c. 28,000 d. 22,000 ANSWER:

RATIONALE:

Projected sales

20,000

Add: Desired ending inventory (20% of 40,000)

8,000

Total

28,000

Less: Estimated beginning inventory (20% of 20,000)

4,000

Budgeted production

24,000

POINTS: DIFFICULTY:

Page 86

Chapter 22 - Budgeting 125. Gilbert’s expects its September sales to be 20% higher than its August sales of $150,000. Manufacturing costs were $100,000 in August and are expected to be $120,000 in September. All sales are on credit and are collected as follows: 30% in the month of the sale and 70% in the following month. Payments of manufacturing costs are as follows: 25% in the month of production and 75% in the following month. The beginning cash balance on September 1 is $7,500. The ending balance on September 30 would be a. $61,500 b. $75,000 c. $72,300 d. $71,500 ANSWER:

RATIONALE:

Credit Sales for September = $150,000 × (1 + 0.2) = $180,000 Beginning cash balance, September 1

$ 7,500

Add: Collections from September sales ($180,000 × 30%)

54,000

Add: Collections from August sales ($150,000 × 70%)

105,000

Less: Payment for September manufacturing costs ($120,000 × 25%)

30,000

Less: Payment for August manufacturing costs ($100,000 × 75%)

75,000

Ending cash balance on September 30

$ 61,500

POINTS: DIFFICULTY:

Page 87

Chapter 22 - Budgeting 126. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $640,000; and cost of goods sold, $2,560,000. The budgeted cost of goods manufactured is a. $1,405,000 b. $2,560,000 c. $2,435,000 d. $3,965,000 ANSWER:

RATIONALE:

Cost of goods sold for the year Add: Finished goods, December 31 Total Less: Finished goods, January 1 Budgeted cost of goods manufactured for the year

$2,560,000 640,000 $3,200,000 765,000 $2,435,000

POINTS: DIFFICULTY:

Page 88

Chapter 22 - Budgeting 127. Woodpecker Co. has $296,000 in accounts receivable on January 1. Budgeted sales for January are $860,000. Woodpecker Co. expects to sell 20% of its merchandise for cash. Of the remaining 80% of sales on account, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are a. $812,000 b. $688,000 c. $468,000 d. $984,000 ANSWER:

RATIONALE:

Sales

$860,000

Cash sales (20% of $860,000)

172,000

Credit sales

$688,000

Collections of accounts receivable: Opening accounts receivable

$296,000

January credit sales ($688,000 × 75%)

516,000

Total

$812,000

Add: Cash sales

172,000

Total collections

$984,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 2:39 PM

Page 89

Chapter 22 - Budgeting 128. The budget that summarizes future plans for the acquisition of fixed assets is the a. direct materials purchases budget b. production budget c. sales budget d. capital expenditures budget ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:41 PM 129. Estimated cash payments are planned reductions in cash from all of the following except a. manufacturing and operating expenses b. capital expenditures c. notes and accounts receivable collections d. payments for interest or dividends ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:42 PM

Page 90

Chapter 22 - Budgeting Use the information below for Nuthatch Corporation to answer the questions that follow. Nuthatch Corporation began its operations on September 1 of the current year. Budgeted sales for the first three months of business—September, October, and November—are $260,000, $375,000, and $400,000, respectively. The company expects to sell 30% of its merchandise for cash. Of sales on account, 80% are expected to be collected in the month of the sale and 20% in the month following the sale. 130. The cash collections expected in September from accounts receivable are estimated to be a. $223,600 b. $145,600 c. $182,000 d. $168,000 ANSWER: RATIONALE:

b September Credit Sales = $260,000 × 70% = $182,000 Cash Collections Expected in September = $182,000 × 80% = $145,600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Nuthatch Corporation LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:42 PM

Page 91

Chapter 22 - Budgeting 131. The cash collections expected in October from accounts receivable are estimated to be a. $246,400 b. $262,500 c. $210,000 d. $294,500 ANSWER:

RATIONALE:

October Credit Sales = $375,000 × 70% = $262,500 Cash collections expected in October: September credit sales ($182,000 × 20%)

$ 36,400

October credit sales ($262,500 × 80%)

210,000

Total collections

$246,400

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Nuthatch Corporation LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:43 PM

Page 92

Chapter 22 - Budgeting 132. The cash collections expected in November from accounts receivable are projected to be a. $280,000 b. $316,400 c. $295,200 d. $276,500 ANSWER:

RATIONALE:

November Credit Sales = $400,000 × 70% = $280,000 Cash collections expected in November: October credit sales ($262,500 × 20%) November credit sales ($280,000 × 80%) Total collections

$ 52,500 224,000 $276,500

POINTS: DIFFICULTY:

Page 93

Chapter 22 - Budgeting Use the information below for Finch Company to answer the questions that follow. Finch Company began its operations on March 31 of the current year. Finch has the following projected costs: April $156,800 1,000 2,000 500

Manufacturing costs (1) Insurance expense (2) Depreciation expense Property tax expense (3)

May $195,200 1,000 2,000 500

June $217,600 1,000 2,000 500

(1) Of the manufacturing costs, three-fourths are paid for in the month they are incurred and one-fourth is paid for in the following month. (2) Insurance expense is $1,000 a month; however, the insurance is paid four times yearly, in the first month of the quarter (i.e., January, April, July, and October). (3) Property tax is paid once a year in November. 133. The cash payments expected for Finch Company in the month of April are a. $122,600 b. $120,600 c. $123,100 d. $121,100 ANSWER:

RATIONALE:

Manufacturing costs ($156,800 × 75%) Insurance expense ($1,000 × 3)

$117,600 3,000

Expected cash payments for April

$120,600

POINTS: DIFFICULTY:

Page 94

Chapter 22 - Budgeting 134. The cash payments expected for Finch Company in the month of May are a. $185,600 b. $149,900 c. $187,600 d. $189,100 ANSWER:

RATIONALE:

Manufacturing costs for April ($156,800 × 25%) Manufacturing costs for May ($195,200 × 75%) Expected cash payments for May

$ 39,200 146,400 $185,600

POINTS: DIFFICULTY:

Page 95

Chapter 22 - Budgeting 135. The cash payments expected for Finch Company in the month of June are a. $215,500 b. $188,800 c. $214,000 d. $212,000 ANSWER:

RATIONALE:

Manufacturing costs for May ($195,200 × 25%) Manufacturing costs for June ($217,600 × 75%)

$ 48,800 163,200

Expected cash payments for June

$212,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Finch Company LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:46 PM 136. Planning for capital expenditures is necessary for all of the following reasons except a. machinery and other fixed assets wear out b. expansion may be necessary to meet increased demand c. amounts spent for office equipment may be immaterial d. fixed assets may fall below minimum standards of efficiency ANSWER: POINTS: DIFFICULTY:

Page 96

Chapter 22 - Budgeting 137. As of January 1 of the current year, Grayson Company had accounts receivable of $40,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and for cash sales) in the month of January? a. $64,000 b. $107,000 c. $61,600 d. $121,600 ANSWER:

RATIONALE:

Credit Sales in January = $120,000 × 80% = $96,000 Beginning accounts receivable, January 1 Add: Collections from January credit sales ($96,000 × 60%) Add: Cash sales in January ($120,000 × 20%)

$ 40,000 57,600 24,000

Total collections in January

$121,600

POINTS: DIFFICULTY:

Page 97

Chapter 22 - Budgeting 138. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and for cash sales) in the month of February? a. $129,600 b. $62,400 c. $133,600 d. $91,200 ANSWER:

RATIONALE:

Credit Sales in January = $120,000 × 80% = $96,000 Credit Sales in February = $140,000 × 80% = $112,000 Collections from January credit sales ($96,000 × 40%) Add: Collections from February credit sales ($112,000 × 60%) Add: Cash sales in February ($140,000 × 20%)

$ 38,400 67,200 28,000

Total collections in February

$133,600

POINTS: DIFFICULTY:

Page 98

Chapter 22 - Budgeting 139. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and cash sales) in the month of March? a. $74,800 b. $146,800 c. $102,000 d. $116,800 ANSWER:

RATIONALE:

Credit Sales in February = $140,000 × 80% = $112,000 Credit Sales in March = $150,000 × 80% = $120,000 Collections from February credit sales ($112,000 × 40%) Add: Collections from March credit sales ($120,000 × 60%) Add: Cash sales in March ($150,000 × 20%) Total collections in March

$ 44,800 72,000 30,000 $146,800

POINTS: DIFFICULTY:

Page 99

Chapter 22 - Budgeting 140. As of January 1 of the current year, Gunner Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the accounts receivable balance as of March 31? a. $72,000 b. $48,000 c. $58,720 d. $60,000 ANSWER: RATIONALE:

b Credit Sales for March = $150,000 × 80% = $120,000 Accounts Receivable Balance on March 31 = $120,000 × 40% = $48,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:49 PM

Page 100

Chapter 22 - Budgeting Use the information below for Dove Corporation to answer the questions that follow. Dove Corporation began its operations on September 1 of the current year. Budgeted sales for the first three months of business—September, October, and November—are $250,000, $320,000, and $410,000, respectively. The company expects to sell 25% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale and 30% in the month following the sale. 141. The cash collections expected in October are a. $320,000 b. $248,000 c. $304,250 d. $382,500 ANSWER:

RATIONALE:

Credit Sales in September = $250,000 × (1 – 0.25) = $187,500 Credit Sales in October = $320,000 × (1 – 0.25) = $240,000 Cash collections expected in October: Collections from September credit sales ($187,500 × 30%) Collections from October credit sales ($240,000 × 70%) Cash sales in October ($320,000 × 25%) Total collections

$ 56,250 168,000 80,000 $304,250

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dove Corporation LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:50 PM

Page 101

Chapter 22 - Budgeting 142. The cash collections in November are a. $317,750 b. $389,750 c. $490,000 d. $410,000 ANSWER:

RATIONALE:

Credit Sales in October = $320,000 × (1 – 0.25) = $240,000 Credit Sales in November = $410,000 × (1 – 0.25) = $307,500 Cash collections expected in November: Collections from October credit sales ($240,000 × 30%) Collections from November credit sales ($307,500 × 70%)

$ 72,000 215,250

Cash sales in November ($410,000 × 25%)

102,500

Total collections

$389,750

POINTS: DIFFICULTY:

Page 102

Chapter 22 - Budgeting 143. Fashion Jeans, Inc. sells two lines of jeans—Simple Life and Fancy Life. Simple Life sells for $85, and Fancy Life sells for $100. The company sells all of its jeans on credit and estimates that 60% is collected in the month of the sale, 35% is collected in the following month, and the rest is considered to be uncollectible. The estimated sales for Simple Life are: January, 20,000 pairs of jeans; February, 27,500 pairs of jeans; and March, 25,000 pairs of jeans. The estimated sales for Fancy Life are: January, 18,000 pairs of jeans; February, 19,000 pairs of jeans; and March, 20,500 pairs of jeans. What are the expected cash receipts for the month of March? a. $3,988,125 b. $2,505,000 c. $2,125,000 d. $4,175,000 ANSWER:

RATIONALE:

Collections from February sales: Simple Life (27,500 × $85 × 35%)

$ 818,125

Fancy Life (19,000 × $100 × 35%) Collections from March sales: Simple Life (25,000 × $85 × 60%)

665,000 $1,275,000

Fancy Life (20,500 × $100 × 60%)

1,230,000

Total collections

$1,483,125

2,505,000 $3,988,125

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/10/2017 8:34 AM

Page 103

Chapter 22 - Budgeting Use the information for the company below to answer the questions that follow. A company is preparing its cash budget. Its cash balance on January 1 is $290,000, and it has a minimum cash requirement of $340,000. The following data have been provided: January February March Cash receipts $1,061,200 $1,182,400 $1,091,700 Cash payments 984,500 1,210,000 1,075,000 144. What is the amount of the deficiency or excess cash (after considering the minimum cash balance required) for January? a. excess of $26,700 b. deficiency of $136,700 c. excess of $356,700 d. excess of $60,000 ANSWER:

RATIONALE:

Cash balance, January 1 Add: Cash receipts in January Less: Cash payments in January Total Less: Minimum cash requirement Excess of cash

$ 290,000 1,061,200 984,500 $ 366,700 340,000 $ 26,700

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cash Budget LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:52 PM

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Chapter 22 - Budgeting 145. What is the amount of cash excess or deficiency (after considering the minimum cash balance required) for February? a. deficiency of $109,100 b. excess of $10,900 c. deficiency of $900 d. excess of $109,100 ANSWER:

RATIONALE:

Cash balance, February 1

$ 366,700

Add: Cash receipts in February

1,182,400

Less: Cash payments in February

1,210,000

Total

$ 339,100

Less: Minimum cash requirement

340,000

Deficiency of cash $ (900) Cash Balance on February 1 = Cash Balance, January 1 + Cash Receipts in January – Cash Payments in January = $290,000 + $1,061,200 – $984,500 = $366,700 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cash Budget LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:53 PM

Page 105

Chapter 22 - Budgeting 146. What is the amount of cash excess or deficiency (after considering the minimum cash balance required) for March? a. excess of $214,200 b. excess of $15,800 c. deficiency of $60,000 d. excess of $25,300 ANSWER:

RATIONALE:

Cash balance, March 1 Add: Cash receipts in March Less: Cash payments in March Total

$ 339,100 1,091,700 1,075,000 $ 355,800

Minimum cash requirement Excess of cash

340,000 $

15,800

Cash Balance on March 1 = Cash Balance, January 1 + Cash Receipts in January – Cash Payments in January + Cash Receipts in February – Cash Payments in February = $290,000 + $1,061,200 – $984,500 + $1,182,400 – $1,210,000 = $339,100 POINTS: DIFFICULTY:

Page 106

Chapter 22 - Budgeting 147. When preparing the cash budget, all of the following should be considered except a. cash receipts from customers b. depreciation expense c. cash payments to suppliers d. cash payments for equipment ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:54 PM 148. Which of the following would not be used in preparing a cash budget for October? a. beginning cash balance on October 1 b. budgeted salaries expense for October c. estimated depreciation expense for October d. budgeted sales and collections for October ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 5:23 PM

Page 107

Chapter 22 - Budgeting 149. Southern Company is preparing a cash budget for April. The company has $12,000 cash at the beginning of April and anticipates $30,000 in cash receipts and $34,500 in cash disbursements during April. Southern Company has an agreement with its bank to maintain a minimum cash balance of $10,000. To maintain the required balance during April, the company must a. borrow $4,500 b. borrow $2,500 c. borrow $7,500 d. borrow $5,000 ANSWER:

RATIONALE:

Beginning cash balance for April Add: Cash receipts during the month Less: Cash payments during the month Total

$12,000 30,000 34,500 $ 7,500

Less: Minimum cash requirement

10,000

Deficiency of cash

$(2,500)

The company needs to borrow $2,500 to maintain the required balance. POINTS: DIFFICULTY:

Page 108

Chapter 22 - Budgeting 150. Tara Company’s budget shows the following credit sales for the current year: September, $25,000; October, $36,000; November, $30,000; December, $32,000. Experience has shown that payment for credit sales is received as follows: 15% in the month of sale, 60% in the first month after sale, 20% in the second month after sale, and 5% is uncollectible. How much cash will Tara Company expect to collect in November as a result of current and past credit sales? a. $19,700 b. $28,400 c. $30,000 d. $31,100 ANSWER:

RATIONALE:

Collections from September sales (20% × $25,000) Collections from October sales (60% × $36,000)

$ 5,000 21,600

Collections from November sales (15% × $30,000)

4,500

Total collections in November

$31,100

POINTS: DIFFICULTY:

Page 109

Chapter 22 - Budgeting 151. A company’s history indicates that 20% of its sales are for cash and the rest are on credit. Collections on credit sales are 20% in the month of the sale, 50% in the next month, 25% the following month, and 5% is uncollectible. Projected sales for December, January, and February are $60,000, $85,000, and $95,000, respectively. The February expected cash receipts from all current and prior credit sales are a. $61,200 b. $57,000 c. $66,400 d. $90,250 ANSWER:

RATIONALE:

Collections from December sales (25% × $48,000*) Collections from January sales (50% × $68,000**)

$12,000 34,000

Collections from February sales (20% × $76,000*** )

15,200

Total collections in February

$61,200

Credit sales in: *December = 80% × $60,000 = $48,000 **January = 80% × $85,000 = $68,000 ***February = 80% × $95,000 = $76,000 POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:56 PM

Page 110

Chapter 22 - Budgeting Matching Match each phrase that follows with the term (a–e) it describes. a. Planning b. Directing c. Controlling d. Budgetary slack e. Goal conflict DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:57 PM 152. Actions to achieve budgeted goals ANSWER: b POINTS: 1 153. Setting goals ANSWER: a POINTS: 1 154. Occurs when budgets are too loose ANSWER: d POINTS: 1 155. Occurs when employee self-interests are different from company goals ANSWER: e POINTS: 1 156. Compares actual performance against budgeted goals ANSWER: c POINTS: 1

Page 111

Chapter 22 - Budgeting Match the phrase that follows with the term (a–e) it describes. a. Static budget b. Flexible budget c. Master budget d. Sales budget e. Production budget DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCT.WARD.18.22-03 - 22-03 ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:58 PM 157. Integrated set of operating and financing budgets for a period of time ANSWER: c POINTS: 1 158. Begins by estimating the quantity of sales ANSWER: d POINTS: 1 159. Shows expected results at several activity levels ANSWER: b POINTS: 1 160. Estimates the number of units to be manufactured to meet sales and inventory levels ANSWER: e POINTS: 1 161. Shows expected results at only one activity level ANSWER: a POINTS: 1 Match each phrase that follows with the term (a–f) it describes. a. Budget b. Capital expenditures budget c. Sales budget d. Production budget Copyright Cengage Learning. Powered by Cognero.

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Chapter 22 - Budgeting e. Cash budget f. Budgeted balance sheet DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCT.WARD.18.22-04 - 22-04 ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 6:58 PM 162. An accounting report that presents predicted amounts of the company’s assets, liabilities, and equity as of the end of the budget period ANSWER: f POINTS: 1 163. Plans an important role for organizations in planning, directing, and controlling a company's future goals ANSWER: a POINTS: 1 164. A plan showing the units of goods to be sold and the sales to be derived; usually the starting point in the budgeting process ANSWER: c POINTS: 1 165. A plan that lists dollar amounts to be spent on purchasing additional plant assets to carry out the budgeted business activities ANSWER: b POINTS: 1 166. A plan showing the number of units to be produced each month ANSWER: d POINTS: 1 167. A plan that shows the expected cash inflows and outflows during the budget period, including receipts from loans needed to maintain a minimum cash balance and repayments of such loans ANSWER: e POINTS: 1

Page 113

Chapter 22 - Budgeting Subjective Short Answer 168. Describe a master budget and the sequence in which the individual budgets within the master budget are prepared. ANSWER:

The master budget is a comprehensive plan, expressed in monetary terms, for an entire organization for a given period. It is prepared from individual budgets of the various segments of the organization.

The master budget usually starts with predictions of sales. Using the sales projection, the remaining operating budgets are prepared. Then capital expenditures are budgeted. Using the information from the operating and the capital expenditures budgets, the financial budgets can then be prepared, including the cash budget, budgeted income statement, and budgeted balance sheet. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 7:52 PM 169. Describe at least five benefits of budgeting. ANSWER:

Student answers should include the following benefits: Budgeting promotes good decision-making processes, including analysis (1) and research. (2) Budgeting focuses management’s attention on the future. (3) Budgeting provides a basis for evaluating performance. (4) Budgeting can be used as a motivator. (5) Budgeting provides a means of coordinating business activities.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 7:55 PM

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Chapter 22 - Budgeting 170. Why is the sales budget usually prepared first? ANSWER:

The sales budget is normally prepared first because the other operating budgets and financial budgets depend on information provided by the sales budget. The plans of most departments are related to expected sales units and dollars. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-01 - 22-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 7:56 PM 171. At the beginning of the period, the Cutting Department budgeted direct labor of $30,000 and supervisor salaries of $20,000 for 3,000 hours of production. The department actually completed 5,000 hours of production. Determine the budget for the department assuming that it uses flexible budgeting. ANSWER:

Variable cost: Direct labor (5,000 × $10.00* per hour) Fixed cost: Supervisor salaries Total department cost *$30,000 ÷ 3,000 hours

$50,000 20,000 $70,000

POINTS: DIFFICULTY:

Page 115

Chapter 22 - Budgeting 172. Doran Technologies produces a single product. Expected manufacturing costs are as follows: Variable costs Direct materials Direct labor Manufacturing overhead

$4.00 per unit $1.20 per unit $0.95 per unit

Fixed costs per month Depreciation Supervisor salaries Other fixed costs

$ 6,000 13,500 3,850

Estimate manufacturing costs for production levels of 25,000 units, 30,000 units, and 35,000 units per month. ANSWER:

At 25,000 units = [25,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $177,100 At 30,000 units = [30,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $207,850

At 35,000 units = [35,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $238,600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:17 PM

Page 116

Chapter 22 - Budgeting 173. Rodger's Cabinet Manufacturers uses flexible budgets that are based on the following manufacturing data for the month of July: Direct materials Direct labor Electric power (variable) Electric power (fixed) Supervisor salaries Property taxes on factory Straight-line depreciation

$8 per unit $5 per unit $0.30 per unit $4,000 per month $25,000 per month $4,000 per month $2,900 per month

Prepare a flexible budget for Rodger's based on production of 10,000, 15,000, and 20,000 units. ANSWER: Rodger's Cabinet Manufacturers Flexible Manufacturing Budget For the Month Ended July 31 Units of production 10,000 15,000 Variable cost: Direct materials ($8 per unit) $ 80,000 $120,000 Direct labor ($5 per unit) 50,000 75,000 Electric power ($0.30 per unit) 3,000 4,500 Total variable cost $133,000 $199,500 Fixed cost: Electric power $ 4,000 $ 4,000 Supervisor salaries 25,000 25,000 Property taxes 4,000 4,000 Depreciation 2,900 2,900 Total fixed cost $ 35,900 $ 35,900 Total manufacturing costs $168,900 $235,400 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:17 PM

20,000 $160,000 100,000 6,000 $266,000

$ 4,000 25,000 4,000 2,900 $ 35,900 $301,900

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Chapter 22 - Budgeting 174. Prepare a flexible budget for Cedar Jeans Company using production levels of 16,000, 18,000, and 20,000 units produced. The following is additional information necessary to complete the budget: Variable costs Direct labor Direct materials Variable manufacturing costs

$6.00 per unit $8.00 per unit $2.50 per unit

Fixed costs Supervisor salaries Rent Depreciation on equipment

ANSWER:

$80,000 12,000 24,000 Cedar Jeans Company Flexible Budget For the Year Ended December 31 Units of production 16,000 18,000 Variable costs: Direct labor ($6.00 per unit) $ 96,000 $108,000 Direct materials ($8.00 per unit) 128,000 144,000 Variable costs ($2.50 per unit) 40,000 45,000 Total variable costs $264,000 $297,000

$120,000 160,000 50,000 $330,000

Fixed costs: Supervisor salaries Rent Depreciation on equipment Total fixed costs Total manufacturing costs

$ 80,000 12,000 24,000 $116,000 $446,000

$ 80,000 12,000 24,000 $116,000 $380,000

$ 80,000 12,000 24,000 $116,000 $413,000

20,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/10/2017 8:38 AM

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Chapter 22 - Budgeting 175. At the beginning of the period, the Molding Department budgeted direct labor of $33,000 and supervisor salaries of $24,000 for 3,000 hours of production. The department actually completed 2,500 hours of production. Determine the budget for the department assuming that it uses flexible budgeting. ANSWER: Variable cost: Direct labor (2,500 × $11.00* per hour) Fixed cost: Supervisor salaries Total department cost *$33,000 ÷ 3,000 hours

$27,500 24,000 $51,500

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-02 - 22-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 8:31 PM 176. Osprey Cycles, Inc. projected sales of 75,000 bicycles for the year. The estimated January 1 inventory is 5,000 units, and the desired December 31 inventory is 8,000 units. What is the budgeted production (in units) for the year? Expected units to be sold 75,000 Plus desired ending inventory, December 31 8,000 Total 83,000 Less estimated beginning inventory, January 1 5,000 Total units to be produced 78,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:19 PM ANSWER:

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Chapter 22 - Budgeting 177. To meet projected annual sales, Bluegill Manufacturers, Inc. needs to produce 75,000 machines for the year. The estimated January 1 inventory is 7,000 units, and the desired December 31 inventory is 12,000 units. What are projected sales units for the year? ANSWER:

Total units to be produced Plus estimated beginning inventory, January 1 Total Less desired ending inventory, December 31 Projected sales

75,000 7,000 82,000 12,000 70,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:20 PM 178. Magnolia, Inc. manufactures bedding sets. The budgeted production is for 55,000 comforters this year. Each comforter requires 7 yards of material. The estimated January 1 beginning inventory is 31,000 yards with the desired ending balance of 30,000 yards of material. If the material costs $4.00 per yard, determine the materials budget for the year.

ANSWER:

Yards of material required for production (55,000 × 7 yards) Plus desired ending inventory, December 31 Total Less estimated beginning inventory, January 1 Total yards to purchase Unit price (per yard) Total direct material to be purchased

385,000 30,000 415,000 31,000 384,000 $4.00 $1,536,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:21 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 22 - Budgeting 179. Sleep Tight, Inc. manufactures bedding sets. The budgeted production is for 52,000 comforters this year. Each comforter requires 1.5 hours to cut and sew the material. The cost of cutting and sewing labor is $12.50 per hour. Determine the direct labor budget for this year. Hours required for cutting and sewing 78,000 hrs. (52,000 × 1.5 hrs.) Hourly rate $12.50 Total direct labor cost $975,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:22 PM ANSWER:

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Chapter 22 - Budgeting 180. Good Night, Inc. manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $51,000, $28,000, and $33,000, respectively. The desired inventories on December 31 for finished goods, work in process, and materials were $48,000, $35,000, and $29,000, respectively. Direct materials purchases were $555,000. Direct labor was $252,000 for the year. Factory overhead was $176,000. Prepare a cost of goods sold budget for Good Night, Inc. ANSWER: Good Night, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 Work in process inventory, January 1 $ 28,000 Direct materials: Direct materials inventory, January 1 $ 33,000 Direct materials purchases 555,000 Cost of direct materials available for use $588,000 Less direct materials inventory, December 31 29,000 Cost of direct materials placed in production $559,000 Direct labor 252,000 Factory overhead 176,000 Total manufacturing costs 987,000 Total work in process during the period $1,015,000 Less work in process inventory, December 31 35,000 Costs of good manufactured Cost of finished goods available for sale Less finished goods inventory Costs of goods sold

51,000

980,000 $1,031,000 48,000 $ 983,000

POINTS: DIFFICULTY:

Page 122

Chapter 22 - Budgeting 181. Sleep Tight, Inc. manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $39,000, $33,000, and $27,000, respectively. The desired inventories on December 31 for finished goods, work in process, and materials were $42,000, $35,000, and $21,000, respectively. Direct materials purchases were $575,000, direct labor was $212,000 for the year, and factory overhead was $156,000. Prepare a cost of goods sold budget for Sleep Tight, Inc. ANSWER: Sleep Tight, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 Work in process inventory, January 1 $ 33,000 Direct materials: Direct materials, January 1 $ 27,000 Direct materials purchases 575,000 Cost of direct materials available for use $602,000 Less direct materials inventory, December 31 21,000 Cost of direct materials placed in production $581,000 Direct labor 212,000 Factory overhead 156,000 Total manufacturing costs 949,000 Total work in process during the period $982,000 Less work in process inventory, December 31 35,000 Costs of good manufactured Cost of finished goods available for sale Less finished goods inventory, December 31 Costs of goods sold

$ 39,000

947,000 $986,000 42,000 $944,000

POINTS: DIFFICULTY:

Page 123

Chapter 22 - Budgeting 182. Kid's World Industries has projected sales of 67,000 machines for the current year. The estimated January 1 inventory is 6,000 units, and the desired December 31 inventory is 15,000 units. What is the budgeted production (in units) for the year? ANSWER:

Expected units to be sold Plus desired ending inventory, December 31 Total Less estimated beginning inventory, January 1 Total units to be produced

67,000 15,000 82,000 6,000 76,000

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:24 PM 183. Future Technologies projected sales of 35,000 computers for this year. The estimated January 1 inventory is 3,000 units, and the desired December 31 inventory is 9,000 units. What is the budgeted production (in units) for the year? ANSWER:

Expected units to be sold Plus desired ending inventory, December 31 Total Less estimated beginning inventory, January 1 Total units to be produced

35,000 9,000 44,000 3,000 41,000

POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 184. Prepare a monthly flexible selling expense budget for Cottonwood Company for sales volumes of $300,000, $350,000, and $400,000, based on the following data: Sales commissions Sales manager's salary Advertising expense Shipping expense Miscellaneous selling expense

6% of sales $120,000 per month $90,000 per month 1% of sales $6,000 per month plus 1.5% of sales Cottonwood Company Monthly Selling Expense Budget $300,000 $350,000

ANSWER:

Sales volume Variable expense: Sales commissions Shipping expense Miscellaneous selling expense Total variable expense

$400,000

$ 18,000 3,000 4,500 $ 25,500

$ 21,000 3,500 5,250 $ 29,750

$ 24,000 4,000 6,000 $ 34,000

Fixed expense: Sales salaries expense Advertising expense Miscellaneous selling expense Total fixed expense Total selling expense

$120,000 90,000 6,000 $216,000 $241,500

$120,000 90,000 6,000 $216,000 $245,750

$120,000 90,000 6,000 $216,000 $250,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:26 PM 185. Based on the following production and sales data of Frixion Co. for March of the current year, prepare (a) a sales budget and (b) a production budget.

Estimated inventory, March 1 Desired inventory, March 31 Expected sales volume: Area I Area II Copyright Cengage Learning. Powered by Cognero.

Product T 28,000 units 32,000 units

Product X 20,000 units 15,000 units

320,000 units 190,000 units

260,000 units 130,000 units Page 125

Chapter 22 - Budgeting $6

Unit sales price ANSWER:

$14

(a) Frixion Co. Sales Budget For the Month Ending March 31 Unit Unit Sales Selling Product and Area Volume Price Product T: Area I 320,000 $6 Area II 190,000 $6 Total 510,000 Product X: Area I 260,000 $14 Area II 130,000 $14 Total 390,000 Total revenue from sales

Total Sales $1,920,000 1,140,000 $3,060,000 $3,640,000 1,820,000 $5,460,000 $8,520,000

(b) Frixion Co. Production Budget For the Month Ending March 31 Product T Expected units to be sold 510,000 Plus desired ending inventory, March 31 32,000 Total (units) 542,000 Less estimated beginning inventory, March 1 28,000 Total units to be produced 514,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:26 PM

Product X 390,000 15,000 405,000 20,000 385,000

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Chapter 22 - Budgeting 186. Tough Jeans Company produces two different styles of jeans, Working Life and Social Life. The company sales budget estimates that 400,000 of the Working Life jeans and 250,000 of the Social Life jeans will be sold during the year. The company begins with 9,000 pairs of Working Life and 18,000 pairs of Social Life. The company desires ending inventory of 7,500 of Working Life and 10,000 of Social Life. Prepare a production budget for the year. Tough Jeans Company Production Budget For the Year Ending December 31

ANSWER:

Expected units to be sold (as per sales budget) Plus desired ending inventory Total

Working Life

Social Life

400,000 7,500 407,500

250,000 10,000 260,000

Less estimated beginning inventory 9,000 Total units to be produced 398,500 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:27 PM

18,000 242,000

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Chapter 22 - Budgeting 187. Diamond Company manufactures two models of cassette recorders, VCH and MTV. Based on the following production data for April, prepare a production budget.

Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Eastern zone Midwest zone Western zone

VCH 2,900 6,900

MTV 4,000 5,250

12,500 19,000 14,500

12,960 19,800 9,840

ANSWER: Diamond Company Production Budget For the Month Ending April 30 VCH Expected units to be sold 46,000 Plus desired ending inventory, April 30 6,900 Total 52,900 Less estimated beginning inventory, April 1 2,900 Total units to be produced 50,000

MTV 42,600 5,250 47,850 4,000 43,850

POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 188. Purple Co.'s production budget for Product X for the year ended December 31 is as follows:

Sales (in units) Plus desired ending inventory Total Less estimated beginning inventory, January 1 Total production

Product X 640,000 85,000 725,000 90,000 635,000

In Purple's production operations, Materials A, B, and C are required to make Product X. The quantities of direct materials expected to be used for each unit of product are as follows: Material A 0.50 lb. per unit Material B 1.00 lb. per unit Material C 1.20 lb. per unit The prices of direct materials are as follows: Material A $0.60 per lb. Material B $1.70 per lb. Material C $1.00 per lb. Prepare a direct materials purchases budget for Product X, assuming that there are no beginning or ending inventories for direct materials (all units purchased are used in production). ANSWER: A Units required for production of Product X (Note A) Unit price Total direct materials purchases Note A:

Direct Materials B

317,500 lb. $0.60 ×

$190,500

Total

635,000 lb. 762,000 lb. $1.70 × $1.00 1,079,500

$762,000

$2,032,000

Material A 635,000 × 0.50 lb. per unit = 317,500 lb. Material B 635,000 × 1.00 lb. per unit = 635,000 lb. Material C 635,000 × 1.20 lb. per unit = 762,000 lb.

POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 189. Ruff Jeans Company produces two different types of jeans, Simple Life and Fancy Life. The company sales budget estimates that 350,000 of the Simple Life jeans and 200,000 of the Fancy Life jeans will be sold during the current year. The production budget requires 353,500 units of Simple Life and 196,000 of Fancy Life to be manufactured. Simple Life jeans require 3 yards of denim material, a zipper, and 25 yards of thread. Fancy Life jeans require 4.5 yards of denim material, a zipper, and 40 yards of thread. Each yard of denim material costs $3.25, each zipper costs $0.75, and the thread is $0.02 per yard. There is enough material to make 2,000 jeans of each type at the beginning of the year. The desired amount of materials left in ending inventory is to have enough to manufacture 3,500 jeans of each type. Prepare a direct materials purchases budget. ANSWER: Ruff Jeans Company Direct Materials Purchases Budget For the Year Ending December 31 Denim Zippers Thread Total Materials required for production: Simple (353,500 units × 3 yds. material) (353,500 units × 1 zipper) (353,500 units × 25 yds. thread) 1,060,500 353,500 8,837,500 Fancy (196,000 units × 4.5 yds. material) (196,000 units × 1 zipper) (196,000 units × 40 yds. thread) 882,000 196,000 7,840,000 Desired ending inventory: Simple (3,500 units × 3 yds. material) (3,500 units × 1 zipper) (3,500 units × 25 yds. thread) 10,500 3,500 87,500 Fancy (3,500 units × 4.5 yds. material) (3,500 units × 1 zipper) (3,500 units × 40 yds. thread) 15,750 3,500 140,000 Total 1,968,750 556,500 16,905,000 Less beginning inventory: Simple (2,000 units × 3 yds. material) (2,000 units × 1 zipper) (2,000 units × 25 yds. thread) 6,000 2,000 50,000 Fancy (2,000 units × 4.5 yds. material) (2,000 units × 1 zipper) (2,000 units × 40 yds. thread) 9,000 2,000 80,000 Total direct materials to be purchased 1,953,750 552,500 16,775,000 Unit price × $3.25 × $0.75 × $0.02 Total direct materials to be purchased $6,349,688 $414,375 $335,500 $7,099,563

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Chapter 22 - Budgeting

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-04 - 22-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/10/2017 8:50 AM 190. Good Eats, Inc. manufactures flatware sets. The budgeted production is for 80,000 sets this year. Each set requires 2.5 hours to polish the material. If polishing labor costs $15.00 per hour, determine the direct labor cost budget for polishing for the year. ANSWER:

Hours required (80,000 × 2.5 hrs.) Hourly rate Total direct labor cost

200,000 hrs. $15.00 $3,000,000

POINTS: DIFFICULTY:

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Chapter 22 - Budgeting 191. Big Wheel, Inc. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $225,000 for March and $250,000 for April. What are the budgeted cash receipts from sales on account for April? ANSWER:

Collections from March sales (75% × $225,000) Collections from April (25% × $250,000) Total receipts from sales on account POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 10:44 PM

April $168,750 62,500 $231,250

192. Big Wheel, Inc. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $150,000 for March and receipts from sales on account total $162,500 in April. What are budgeted sales on account for April? ANSWER:

Collections from March sales (75% × $150,000) Collections from April (25% × X) Total receipts from sales on account X = $200,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 10:48 PM

April $112,500 50,000 $162,500

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Chapter 22 - Budgeting 193. Flanders Industries collects 35% of its sales on account in the month of the sale and 65% in the month following the sale. Sales on account are budgeted to be $175,000 for May and $225,000 for June. What are the budgeted cash receipts from sales on account for June? ANSWER:

Collections from May sales (65% × $175,000) Collections from June (35% × $225,000) Total receipts from sales on account POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 10:50 PM

June $113,750 78,750 $192,500

194. The treasurer of Calico Dreams Company has accumulated the following budget information for the first two months of the coming fiscal year:

Sales Manufacturing costs Selling and administrative expenses Capital additions

March $450,000 290,000 41,400 250,000

April $520,000 350,000 46,400 —

The company expects to sell about 35% of its merchandise for cash. Of sales on account, 80% are collected in full in the month of the sale and the remainder in the month following the sale. One-fourth of the manufacturing costs are paid in the month in which they are incurred and the other three-fourths in the following month. Depreciation, insurance, and property taxes represent $6,400 of the monthly selling and administrative expenses. Insurance is paid in February, and property taxes are paid yearly in September. A $40,000 installment on income taxes is to be paid in April. Of the remainder of the selling and administrative expenses, one-half is to be paid in the month in which they are incurred and the balance in the following month. Capital additions of $250,000 are paid in March. Current assets as of March 1 are composed of cash of $45,000 and accounts receivable of $51,000. Current liabilities as of March 1 are accounts payable of $121,500 ($102,000 for materials purchases and $19,500 for operating expenses). Management desires to maintain a minimum cash balance of $25,000. Prepare a monthly cash budget for March and April. ANSWER: Calico Dreams Company Cash Budget For the Two Months Ending April 30 March Copyright Cengage Learning. Powered by Cognero.

April Page 133

Chapter 22 - Budgeting Estimated cash receipts from: Cash sales* Collections of accounts receivable** Total cash receipts Estimated cash payments for: Manufacturing costs Selling and administrative expenses Capital additions Income taxes Total cash payments Cash increase (decrease) Cash balance at beginning of month Cash balance at end of month Minimum cash balance Excess (deficiency)

$157,500 285,000 $442,500

$182,000 328,900 $510,900

$174,500 37,000 250,000

$305,000 37,500

$461,500 $(19,000) 45,000 $ 26,000 25,000 $ 1,000

40,000 $382,500 $128,400 26,000 $154,400 25,000 $129,400

*$450,000 × 0.35 = $157,500 $520,000 × 0.35 = $182,000 **($450,000 × 0.65 × 0.80) + $51,000 = $285,000 ($520,000 × 0.65 × 0.80) + ($450,000 × 0.65 × 0.20) = $328,900 POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/10/2017 8:46 AM

Page 134

Chapter 22 - Budgeting 195. Star Co. was organized on August 1 of the current year. Projected sales for the next three months are as follows: August September October

$250,000 200,000 275,000

The company expects to sell 50% of its merchandise for cash. Of the sales on account, 30% are expected to be collected in the month of the sale and the remainder in the following month. Prepare a schedule indicating cash collections for August, September, and October. ANSWER:

Sales Cash sales Credit sales

Star Co. Schedule of Collections of Sales For the Three Months Ending October 31 August September $250,000 $200,000 125,000 100,000 $125,000 $100,000

Collections of accounts receivable: August credit sales September credit sales October credit sales Cash sales

$ 37,500

$ 87,500 30,000

October $275,000 137,500 $137,500

125,000

100,000

$ 70,000 41,250 137,500

Total collections $162,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:11 PM

$217,500

$248,750

Page 135

Chapter 22 - Budgeting 196. What is a capital expenditures budget? ANSWER:

The capital expenditures budget lists the amounts to be spent to purchase additional plant assets to carry out the budgeted business activities. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/1/2017 1:05 PM 197. What is a cash budget? How does management use a cash budget? ANSWER:

A cash budget shows expected cash inflows and outflows during the budget period. Management can arrange loans to cover anticipated cash shortages before they are needed. The cash budget also helps avoid a cash balance that is too large. An excess in cash could be invested in temporary income-producing securities such as U.S. Treasury bills or notes. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.22-05 - 22-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.06 - Budget Preparation BUSPROG: Analytic DATE CREATED: 1/16/2017 4:20 PM DATE MODIFIED: 3/8/2017 11:04 PM

Page 136

Chapter 23 - Evaluating Variances from Standard Costs True / False 1. A variable cost system is an accounting system where standards are set for each manufacturing cost element. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 2. Normal standards allow for normal production difficulties and mistakes. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/7/2017 9:33 AM

Page 1

Chapter 23 - Evaluating Variances from Standard Costs 3. Standard costs serve as a device for measuring efficiency. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 23 - Evaluating Variances from Standard Costs 5. Accounting systems that use standards for product costs are called standard cost systems. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 23 - Evaluating Variances from Standard Costs 7. Normally, standard costs should be revised when labor rates change to incorporate new union contracts. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 23 - Evaluating Variances from Standard Costs 9. Financial reporting systems that are guided by the principle of exceptions concept focus attention on variances from standard costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 23 - Evaluating Variances from Standard Costs 11. It is correct to rely exclusively on past cost data when establishing standards. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 12. Ideal standards are developed under conditions that assume no idle time, no machine breakdowns, and no materials spoilage. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 6

Chapter 23 - Evaluating Variances from Standard Costs 13. Currently attainable standards do not allow for reasonable production difficulties. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:16 AM 14. If employees are given bonuses for exceeding normal standards, the standards may be very effective in motivating employees. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 23 - Evaluating Variances from Standard Costs 15. The fact that workers are unable to meet a properly determined direct labor standard is sufficient cause to change the standard. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 16. Changes in technology, machinery, or production methods may make past cost data irrelevant when setting standards. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 8

Chapter 23 - Evaluating Variances from Standard Costs 17. The difference between the standard cost of a product and its actual cost is called a variance. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 23 - Evaluating Variances from Standard Costs 19. Standards are set for only direct labor and direct materials. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 20. The principle of exceptions allows managers to focus on correcting variances between standard costs and actual costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 23 - Evaluating Variances from Standard Costs 21. Because accountants have financial expertise, they are the only ones that are able to set standard costs for the production area. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 22. While setting standards, managers should never allow for spoilage or machine breakdowns in their calculations. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 11

Chapter 23 - Evaluating Variances from Standard Costs 23. A budget performance report compares actual results with the budgeted amounts and reports differences for possible investigation. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 24. A favorable cost variance occurs when actual cost is less than standard cost at actual volumes. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 25. An unfavorable cost variance occurs when standard cost at actual volumes exceeds actual cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:23 AM 26. Standards are designed to evaluate price and quantity variances separately. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 27. If the standard to produce a given amount of product is 2,000 units of direct materials at $12 and the actual is 1,600 units at $13, the direct materials quantity variance is $5,200 favorable. a. True b. False ANSWER: RATIONALE:

False Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (1,600 units – 2,000 units) × $12 = $(4,800) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:25 AM 28. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials quantity variance is $2,200 unfavorable. a. True b. False ANSWER: RATIONALE:

False Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (800 units – 1,000 units) × $11 = $(2,200) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:51 AM

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Chapter 23 - Evaluating Variances from Standard Costs 29. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials price variance is $800 unfavorable. a. True b. False ANSWER: RATIONALE:

True Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($12 – $11) × 800 units = $800 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 30. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials price variance is $800 favorable. a. True b. False ANSWER: RATIONALE:

False Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($12 – $11) × 800 units = $800 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 31. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials quantity variance is $1,000 unfavorable. a. True b. False ANSWER: RATIONALE:

False Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (800 units – 1,000 units) × $11 = –$(2,200) Favorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 32. If the standard to produce a given amount of product is 600 direct labor hours at $17 and the actual is 500 hours at $15, the time variance is $1,500 unfavorable. a. True b. False ANSWER: RATIONALE:

False Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (500 hours – 600 hours) × $17 = – $(1,700) Favorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 33. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual is 500 hours at $17, the time variance is $1,700 unfavorable. a. True b. False ANSWER: RATIONALE:

False Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (500 hours – 600 hours) × $15 = – $(1,500) Favorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 34. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual is 600 hours at $17, the rate variance is $1,200 unfavorable. a. True b. False ANSWER: RATIONALE:

True Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($17 – $15) × 600 hours = $2 × 600 hours = $1,200 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 35. If the standard to produce a given amount of product is 500 direct labor hours at $15 and the actual is 600 hours at $17, the rate variance is $1,200 favorable. a. True b. False ANSWER: RATIONALE:

False Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($17 – $15) × 600 hours = $2 × 600 hours = $1,200 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 36. Standard costs are determined by multiplying expected price by expected quantity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 37. Standards are more widely used for nonmanufacturing activities than for manufacturing activities. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 38. The direct labor time variance measures the efficiency of the direct labor force. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 39. The variance from standard for factory overhead cost resulting from operating at a level above or below 100% of normal capacity is termed volume variance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 40. The variance from standard for factory overhead resulting from incurring a total amount of factory overhead cost that is greater or less than the amount budgeted for the level of operations achieved is termed controllable variance. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 41. The most effective means of presenting standard factory overhead cost variance data is through a factory overhead cost variance report. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 42. Since the controllable variance measures the efficiency of using variable overhead resources, if budgeted variable overhead exceeds actual results, the variance is favorable. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 43. An unfavorable fixed factory overhead volume variance may be due to a failure of supervisors to maintain an even flow of work. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 44. Favorable fixed factory overhead volume variances are never harmful, since achieving them encourages managers to run the factory above normal capacity. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 45. Volume variance measures the use of fixed factory overhead resources. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 46. Though favorable fixed factory overhead volume variances are usually good news, if inventory levels are too high, additional production could be harmful. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 47. Standard costs are a useful management tool that can be used solely as a statistical device apart from the ledger or they can be incorporated in the accounts. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 48. At the end of the fiscal year, the variances from standard are usually transferred to the finished goods account. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 49. Standard cost variances are usually not reported in reports to stockholders. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 50. Nonfinancial measures are often linked to the inputs or outputs of an activity or process. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:54 AM

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Chapter 23 - Evaluating Variances from Standard Costs 51. A company must choose either a standard system or nonfinancial performance measures to evaluate the performance of a company. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 52. Nonfinancial performance output measures are used to improve the input measures. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 53. An example of a nonfinancial measure is the number of customer complaints. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 54. A company should only use nonfinancial performance measures when financial measures cannot be calculated. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs Multiple Choice 55. Which of the following conditions normally would not indicate that standard costs should be revised? a. The Engineering Department has revised product specifications in responding to customer suggestions. b. The company has signed a new union contract that increases the factory wages on average by $3.50 an hour. c. Actual costs differed from standard costs for the preceding week. d. The average price of raw materials increased from $4.68 per pound to $4.82 per pound. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:55 AM 56. Standards that represent levels of operation that can be attained with reasonable effort are called a. theoretical standards b. ideal standards c. variable standards d. normal standards ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 57. Standard costs are used in companies for a variety of reasons. Which of the following is not one of the benefits of using standard costs? a. used to indicate where changes in technology and machinery need to be made b. used to estimate cost of inventory c. used to plan direct materials, direct labor, and variable factory overhead d. used to control costs ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:56 AM 58. The principle of exceptions allows managers to focus on correcting variances between a. standard costs and actual costs b. variable costs and actual costs c. competitor’s costs and actual costs d. competitor’s costs and standard costs ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 59. Periodic comparisons between planned objectives and actual performance are reported in a. zero-base reports b. budget performance reports c. master budgets d. budgets ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:57 AM 60. The standard price and quantity of direct materials are separated because a. GAAP and IFRS reporting requires separation b. direct materials prices are controlled by the purchasing department and quantity used is controlled by the production department c. standard prices are more difficult to estimate than standard quantities d. standard quantities change more frequently than standard prices ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 61. Standard costs are divided into which of the following components? a. variance standard and quantity standard b. materials standard and labor standard c. quality standard and quantity standard d. price standard and quantity standard ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 62. A favorable cost variance occurs when a. actual costs are more than standard costs b. standard costs are more than actual costs c. standard costs are less than actual costs d. actual costs are the same as standard costs ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 63. The total manufacturing cost variance consists of a. direct materials price variance, direct labor cost variance, and fixed factory overhead volume variance b. direct materials cost variance, direct labor rate variance, and factory overhead cost variance c. direct materials cost variance, direct labor cost variance, and variable factory overhead controllable variance d. direct materials cost variance, direct labor cost variance, and factory overhead cost variance ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 64. Myers Corporation has the following data related to direct materials costs for November: actual costs for 5,000 pounds of material, $4.50; and standard costs for 4,800 pounds of material at $5.10 per pound. What is the direct materials price variance? a. $3,000 favorable b. $3,000 unfavorable c. $2,880 favorable d. $2,880 unfavorable ANSWER: RATIONALE:

a Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($4.50 – $5.10) × 5,000 pounds = $(0.60) × 5,000 pounds = $(3,000) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 8:59 AM

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Chapter 23 - Evaluating Variances from Standard Costs 65. The total manufacturing cost variance is a. the difference between actual costs and standard costs for units produced b. the flexible budget variance plus the time variance c. the difference between planned costs and standard costs for units produced d. None of these choices ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:08 AM

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Chapter 23 - Evaluating Variances from Standard Costs 66. Jaxson Corporation has the following data related to direct labor costs for September: actual costs are 10,200 hours at $15.75 per hour and standard costs are 10,800 hours at $15.50 per hour. What is the direct labor time variance? a. $9,300 favorable b. $9,300 unfavorable c. $9,450 favorable d. $9,450 unfavorable ANSWER: RATIONALE:

a Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (10,200 hours – 10,800 hours) × $15.50 = (600) hours × $15.50 = $(9,300) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:09 AM

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Chapter 23 - Evaluating Variances from Standard Costs 67. Myers Corporation has the following data related to direct materials costs for November: actual costs for 5,000 pounds of material at $4.50 and standard costs for 4,800 pounds of material at $5.10 per pound. What is the direct materials quantity variance? a. $ 1,020 favorable b. $ 1,020 unfavorable c. $ 900 favorable d. $ 900 unfavorable ANSWER: RATIONALE:

b Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (5,000 pounds – 4,800 pounds) × $5.10 = $1,020 Unfavorable Variance POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 68. The following data relate to direct labor costs for August: Actual costs: 5,500 hours at $24.00 per hour Standard costs: 5,000 hours at $23.70 per hour What is the direct labor rate variance? a. $ 1,650 favorable b. $ 1,650 unfavorable c. $ 1,500 favorable d. $ 1,500 unfavorable ANSWER: RATIONALE:

b Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($24.00 – $23.70) × 5,500 hours = $0.30 × 5,500 hours = $1,650 Unfavorable Variance POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 69. Which of the following is not a reason standard costs are separated into two components? a. The price and quantity variances need to be identified separately to correct the actual major differences. b. Identifying variances determines which manager must find a solution to major discrepancies. c. If a negative variance is overshadowed by a favorable variance, managers may overlook potential corrections. d. Variances bring attention to discrepancies in the budget and require managers to revise budgets closer to actual results. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:10 AM

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Chapter 23 - Evaluating Variances from Standard Costs 70. The standard costs and actual costs for direct materials for the manufacture of 3,000 actual units of product are as follows: Standard Costs Direct materials (per completed unit)

1,040 kilograms at $8.75

Actual Costs Direct materials

2,000 kilograms at $8.00

The direct materials price variance is a. $2,750 unfavorable variance b. $2,750 favorable variance c. $1,500 favorable variance d. $1,500 unfavorable variance ANSWER: RATIONALE:

c Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($8.00 – $8.75) × 2,000 kilograms = $(0.75) × 2,000 kilograms = $(1,500) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:12 AM

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Chapter 23 - Evaluating Variances from Standard Costs 71. The standard costs and actual costs for direct materials for the manufacture of 2,500 actual units of product are as follows: Standard Costs 2,500 kilograms @ $8.50

Direct materials Actual Costs

Direct materials

2,600 kilograms @ $8.75

The direct materials quantity variance is a. $875 favorable variance b. $850 unfavorable variance c. $850 favorable variance d. $875 unfavorable variance ANSWER: RATIONALE:

b Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (2,600 kilograms – 2,500 kilograms) × $8.50 = $850 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:13 AM

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Chapter 23 - Evaluating Variances from Standard Costs 72. If the actual quantity of direct materials used in producing a commodity differs from the standard quantity, the variance is a a. controllable variance b. price variance c. quantity variance d. rate variance ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 73. If the price paid per unit differs from the standard price per unit for direct materials, the variance is a a. variable variance b. controllable variance c. price variance d. volume variance ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM Use this information for Stringer Company to answer the questions that follow. The following data are given for Stringer Company:

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Chapter 23 - Evaluating Variances from Standard Costs Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000

Overhead is applied on standard labor hours.

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Chapter 23 - Evaluating Variances from Standard Costs 74. The direct materials price variance is a. $22,800 unfavorable b. $22,800 favorable c. $52,000 unfavorable d. $52,000 favorable ANSWER: RATIONALE:

a Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity Actual Price = Actual Price Paid for Materials/Actual Ounces Purchased and Used in Production = $1,504,800/228,000 ounces = $6.60 Direct Materials Price Variance = ($6.60 – $6.50) × 228,000 ounces = $0.10 × 228,000 ounces = $22,800 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stringer Co. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:15 AM

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Chapter 23 - Evaluating Variances from Standard Costs 75. The direct materials quantity variance is a. $22,800 favorable b. $22,800 unfavorable c. $52,000 favorable d. $52,000 unfavorable ANSWER: RATIONALE:

d Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price Standard Quantity = Actual Production/Standard Ounces per Completed Unit = 27,500 units × 8 ounces = 220,000 ounces Direct Materials Quantity Variance = (228,000 ounces – 220,000 ounces) × $6.50 = $52,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stringer Co. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:16 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information for Lucy Corporation to answer the questions that follow. Lucy Corporation purchased and used 129,000 board feet of lumber in production, at a total cost of $1,548,000. Original production had been budgeted for 22,000 units with a standard material quantity of 5.7 board feet per unit and a standard price of $12 per board foot. Actual production was 23,500 units. 76. The direct materials price variance is a. $0 b. $59,400 unfavorable c. $59,400 favorable d. $6,000 unfavorable ANSWER: RATIONALE:

a Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity Actual Price = Total Cost/Actual Lumber Purchased and Used in Production = $1,548,000/129,000 board feet = $12 Direct Materials Price Variance = ($12 – $12) × 129,000 board feet = $0 × 129,000 board feet = $0 POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Lucy Corporation LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:19 AM

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Chapter 23 - Evaluating Variances from Standard Costs 77. The direct materials quantity variance is a. $63,000 favorable b. $63,000 unfavorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: RATIONALE:

c Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price Standard Quantity = Actual Production × Standard Material Quantity per Unit = 23,500 units × 5.7 board feet = 133,950 board feet Direct Materials Quantity Variance = (129,000 board feet – 133,950 board feet) × $12 = $(59,400) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Lucy Corporation LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:21 AM

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Chapter 23 - Evaluating Variances from Standard Costs 78. If the wage rate paid per hour differs from the standard wage rate per hour for direct labor, the variance is a a. variable variance b. rate variance c. quantity variance d. volume variance ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 79. If the actual direct labor hours spent producing a commodity differ from the standard hours, the variance is a a. time variance b. price variance c. quantity variance d. rate variance ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:22 AM

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Chapter 23 - Evaluating Variances from Standard Costs 80. The following data relate to direct labor costs for the current period: Standard costs Actual costs

7,500 hours at $11.70 6,000 hours at $12.00

What is the direct labor time variance? a. $18,000 favorable b. $18,000 unfavorable c. $17,550 unfavorable d. $17,550 favorable ANSWER: RATIONALE:

d Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (6,000 hours – 7,500 hours) × $11.70 = (1,500) hours × $11.70 = $(17,550) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:23 AM

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Chapter 23 - Evaluating Variances from Standard Costs 81. The following data relate to direct labor costs for the current period: Standard costs Actual costs

6,000 hours at $12.00 7,500 hours at $11.40

What is the direct labor rate variance? a. $18,000 unfavorable b. $4,500 favorable c. $17,100 unfavorable d. $3,600 favorable ANSWER: RATIONALE:

b Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($11.40 – $12.00) × 7,500 hours = $(0.60) × 7,500 hours = $(4,500) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:24 AM

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Chapter 23 - Evaluating Variances from Standard Costs 82. The following data relate to direct labor costs for the current period: Standard costs 9,000 hours at $5.50 Actual costs 8,500 hours at $5.75 What is the direct labor rate variance? a. $2,250 unfavorable b. $2,125 unfavorable c. $2,250 favorable d. $2,125 favorable ANSWER: RATIONALE:

b Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($5.75 – $5.50) × 8,500 hours = $0.25 × 8,500 hours = $2,125 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 83. The following data relate to direct labor costs for the current period: Standard costs 36,000 hours at $22.00 Actual costs 35,000 hours at $23.00 What is the direct labor time variance? a. $36,000 unfavorable b. $35,000 unfavorable c. $23,000 favorable d. $22,000 favorable ANSWER: RATIONALE:

d Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (35,000 hours – 36,000 hours) × $22.00 = (1,000) hours × $22.00 = $(22,000) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:25 AM

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Chapter 23 - Evaluating Variances from Standard Costs 84. The standard costs and actual costs for direct labor for the manufacture of 2,500 actual units of product are as follows: Standard Costs Direct labor7,500 hours @ $11.80

Actual Costs Direct labor7,400 hours @ $11.40 The direct labor rate variance is a. $2,960 unfavorable b. $4,500 favorable c. $2,960 favorable d. $4,500 unfavorable ANSWER: RATIONALE:

c Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($11.40 – $11.80) × 7,400 hours = $(0.40) × 7,400 hours = $(2,960) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:26 AM

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Chapter 23 - Evaluating Variances from Standard Costs 85. The standard costs and actual costs for direct labor in the manufacture of 2,500 units of product are as follows: Standard Costs Direct labor 7,500 hours @ $11.80 Actual Costs Direct labor 7,400 hours @ $11.40 The direct labor time variance is a. $1,180 favorable b. $1,140 unfavorable c. $1,180 unfavorable d. $1,140 favorable ANSWER: RATIONALE:

a Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (7,400 hours – 7,500 hours) × $11.80 = (100) hours × $11.80 = $(1,180) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The following data relate to direct labor costs for February: Actual costs Standard costs

7,700 hours at $14.00 7,000 hours at $16.00

86. What is the direct labor time variance? a. $7,700 favorable b. $7,700 unfavorable c. $11,200 unfavorable d. $11,200 favorable ANSWER: RATIONALE:

c Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (7,700 hours – 7,000 hours) × $16.00 = 700 hours × $16.00 = $11,200 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Feb direct labor costs LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 87. What is the direct labor rate variance? a. $14,000 favorable b. $14,000 unfavorable c. $15,400 favorable d. $15,400 unfavorable ANSWER: RATIONALE:

c Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($14.00 – $16.00) × 7,700 hours = $(2.00) × 7,700 hours = $(15,400) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Feb direct labor costs LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:31 AM Use this information for Harry Company to answer the questions that follow. The following data are given for Harry Company: Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22.00 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000

Overhead is applied on standard labor hours. (Round interim calculations to the nearest cent.) Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs

88. The direct labor rate variance is a. $5,490 unfavorable b. $5,490 favorable c. $33,000 favorable d. $33,000 unfavorable ANSWER: RATIONALE:

b Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours Actual Rate per Hour = Actual Total Labor Costs/Actual Labor Hours Worked = $4,020,000/183,000 = $21.97 Direct Labor Rate Variance = ($21.97 – $22.00) × 183,000 hours = $(0.03) × 183,000 hours = $(5,490) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harry Co. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:34 AM

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Chapter 23 - Evaluating Variances from Standard Costs 89. The direct labor time variance is a. $6,000 favorable b. $6,000 unfavorable c. $33,000 unfavorable d. $33,000 favorable ANSWER: RATIONALE:

c Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour Standard Direct Labor Hours = Standard Hours Allowed per Completed Unit × Actual Production = 6.6 hours × 27,500 units = 181,500 hours Direct Labor Time Variance = (183,000 hours – 181,500 hours) × $22.00 = 1,500 hours × $22.00 = $33,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Harry Co. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:36 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information for Flapjack Corporation to answer the questions that follow. Flapjack Corporation had 8,200 actual direct labor hours at an actual rate of $12.40 per hour. Original production had been budgeted for 1,100 units, but only 1,000 units were actually produced. Labor standards were 7.6 hours per completed unit at a standard rate of $13.00 per hour. 90. The direct labor rate variance is a. $4,920 unfavorable b. $4,920 favorable c. $4,560 favorable d. $4,560 unfavorable ANSWER: RATIONALE:

b Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($12.40 – $13.00) × 8,200 hours = $(0.60) × 8,200 hours = $(4,920) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flapjack Corp. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:39 AM

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Chapter 23 - Evaluating Variances from Standard Costs 91. The direct labor time variance is a. $9,880 favorable b. $9,880 unfavorable c. $7,800 unfavorable d. $7,800 favorable ANSWER: RATIONALE:

c Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (8,200 hours – 7,600 hours) × $13.00 = 600 hours × $13.00 = $7,800 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flapjack Corp. LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:40 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The following data relate to direct materials costs for February: Materials cost per yard: standard, $2.00; actual, $2.10 Standard yards per unit: standard, 4.5 yards; actual, 4.75 yards Units of production: 9,500 92. Calculate the total direct materials cost variance. a. $9,262.50 unfavorable b. $9,262.50 favorable c. $3,780.00 unfavorable d. $3,562.50 favorable ANSWER: RATIONALE:

a Total Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity Actual Quantity = Actual Yards per Unit × Units of Production = 4.75 yards × 9,500 units = 45,125 yards Direct Materials Price Variance = ($2.10 – $2.00) × 45,125 yards = $0.10 × 45,125 yards = $4,512.50 Unfavorable Variance Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price Standard Quantity = Actual Production × Standard Material Quantity per Unit = 9,500 units × 4.5 yards = 42,750 yards Direct Materials Quantity Variance = (45,125 yards – 42,750 yards) × $2.00 = $4,750 Unfavorable Variance Total Direct Materials Cost Variance = $4,512.50 + $4,750 = $9,262.50 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Total Direct Materials LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:43 AM

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Chapter 23 - Evaluating Variances from Standard Costs 93. Calculate the direct materials price variance. a. $1,795.50 favorable b. $378.00 favorable c. $4,512.50 unfavorable d. $378.00 unfavorable ANSWER: RATIONALE:

c Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity Actual Quantity = Actual Yards per Unit × Units of Production = 4.75 yards × 9,500 units = 45,125 yards Direct Materials Price Variance = ($2.10 – $2.00) × 45,125 yards = $0.10 × 45,125 yards = $4,512.50 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Total Direct Materials LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:44 AM

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Chapter 23 - Evaluating Variances from Standard Costs 94. Calculate the direct materials quantity variance. a. $4,512.50 unfavorable b. $4,512.50 favorable c. $4,750.00 unfavorable d. $4,750.00 favorable ANSWER: RATIONALE:

c Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price Standard Quantity = Actual Production × Standard Material Quantity per Unit = 9,500 units × 4.5 yards = 42,750 yards Direct Materials Quantity Variance = (45,125 yards – 42,750 yards) × $2.00 = $4,750.00 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Total Direct Materials LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:45 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The following data relate to direct labor costs for March: Rate: standard, $12.00; actual, $12.25 Hours: standard, 18,500; actual, 17,955 Units of production: 9,450 95. Calculate the total direct labor variance. a. $2,051.25 favorable b. $2,051.25 unfavorable c. $2,362.50 unfavorable d. $2,362.50 favorable ANSWER: RATIONALE:

a Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (17,955 hours – 18,500 hours) × $12.00 = (545) hours × $12.00 = $(6,540) Favorable Variance Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($12.25 – $12.00) × 17,955 hours = $0.25 × 17,955 hours = $4,488.75 Unfavorable Variance Total Direct Labor Variance = Direct Labor Time Variance + Direct Labor Rate Variance = $(6,540) + $4,488.75 = $(2,051.25) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Direct Labor LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:50 AM

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Chapter 23 - Evaluating Variances from Standard Costs 96. Calculate the direct labor time variance. a. $2,362.50 favorable b. $2,362.50 unfavorable c. $6,540.00 favorable d. $6,540.00 unfavorable ANSWER: RATIONALE:

c Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (17,955 hours – 18,500 hours) × $12.00 = (545) hours × $12.00 = $(6,540.00) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Direct Labor LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:52 AM

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Chapter 23 - Evaluating Variances from Standard Costs 97. Calculate the direct labor rate variance. a. $4,488.75 unfavorable b. $6,851.25 favorable c. $4,488.75 favorable d. $6,851.25 unfavorable ANSWER: RATIONALE:

a Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($12.25 – $12.00) × 17,955 hours = $0.25 × 17,955 hours = $4,488.75 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Direct Labor LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 98. Which of the following is not a reason for a direct materials quantity variance? a. malfunctioning equipment b. purchasing of inferior raw materials c. increased material cost per unit d. spoilage of materials ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 99. The formula to compute the direct labor rate variance is to calculate the difference between a. Actual Costs + (Actual Hours × Standard Rate) b. Actual Costs – Standard Costs c. (Actual Hours × Standard Rate) – Standard Costs d. Actual Costs – (Actual Hours × Standard Rate) ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:54 AM 100. The formula to the compute direct labor time variance is to calculate the difference between a. Actual Costs – Standard Costs b. Actual Costs + Standard Costs c. (Actual Hours × Standard Rate) – Standard Costs d. Actual Costs – (Actual Hours × Standard Rate) ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 9:56 AM

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Chapter 23 - Evaluating Variances from Standard Costs 101. The formula to compute the direct materials price variance is to calculate the difference between a. Actual Costs – (Actual Quantity × Standard Price) b. Actual Costs + Standard Costs c. Actual Costs – Standard Costs d. (Actual Quantity × Standard Price) – Standard Costs ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:34 AM 102. The formula to compute the direct materials quantity variance is to calculate the difference between a. Actual Costs – Standard Costs b. Standard Costs – Actual Costs c. (Actual Quantity × Standard Price) – Standard Costs d. Actual Costs – (Standard Price × Standard Costs) ANSWER: POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 103. Which of the following would not lend itself to applying direct labor variances? a. help desk assistant b. research and development scientist c. customer service personnel d. telemarketer ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of actual production are as follows: Standard Costs Fixed overhead (based on 10,000 hours) 3 hours per unit @ $0.80 per hour Variable overhead

3 hours per unit @ $2.00 per hour Actual Costs

Total variable cost, $18,000 Total fixed cost, $8,000

104. The fixed factory overhead volume variance is a. $2,000 favorable b. $2,000 unfavorable c. $2,500 unfavorable d. $0 ANSWER: RATIONALE:

b Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate Fixed Factory Overhead Volume Variance = [10,000 hours – (2,500 units × 3 hours)] × $0.80 = (10,000 hours – 7,500 hours) × $0.80 = $2,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Factory overhead LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:42 AM

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Chapter 23 - Evaluating Variances from Standard Costs 105. The total factory overhead cost variance is a. $2,000 favorable b. $5,000 unfavorable c. $2,500 unfavorable d. $5,000 favorable ANSWER: RATIONALE:

b Factory Overhead Cost Variance = Fixed Factory Overhead Volume Variance + Variable Factory Overhead Controllable Variance Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = [10,000 hours – (2,500 units × 3 hours)] × $0.80 = (10,000 hours – 7,500 hours) × $0.80 = $2,000 Unfavorable Variance Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $18,000 – ($2.00 × 3 hours per unit × 2,500 units) = $18,000 – $15,000 = $3,000 Unfavorable Variance Total Factory Overhead Cost Variance = $2,000 Unfavorable Variance + $3,000 Unfavorable Variance = $5,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Factory overhead LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:41 AM

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Chapter 23 - Evaluating Variances from Standard Costs 106. The variable factory overhead controllable variance is a. $2,000 unfavorable b. $3,000 favorable c. $0 d. $3,000 unfavorable ANSWER: RATIONALE:

d Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $18,000 – ($2.00 × 3 hours per unit × 2,500 units) = $18,000 – $15,000 = $3,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Factory overhead LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:41 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The standard factory overhead rate is $10 per direct labor hour ($8 for variable factory overhead and $2 for fixed factory overhead) based on 100% of normal capacity of 30,000 direct labor hours. The standard cost and the actual cost of factory overhead for the production of 5,000 units during May were as follows: Standard:

25,000 hours at $10

$250,000

Actual:

Variable factory overhead Fixed factory overhead

$202,500 60,000

107. What is the fixed factory overhead volume variance? a. $12,500 favorable b. $10,000 unfavorable c. $12,500 unfavorable d. $10,000 favorable ANSWER: RATIONALE:

b Fixed Factory Overhead Volume Variance = (30,000 hours – 25,000 hours ) × $2 = $10,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Standard factory rate LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:45 AM

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Chapter 23 - Evaluating Variances from Standard Costs 108. What is the variable factory overhead controllable variance? a. $10,000 favorable b. $2,500 unfavorable c. $10,000 unfavorable d. $2,500 favorable ANSWER: RATIONALE:

b Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $202,500 – ($8 variable overhead per unit × 25,000 budgeted variable factory hours) = $202,500 – $200,000 = $2,500 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Standard factory rate LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:47 AM

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Chapter 23 - Evaluating Variances from Standard Costs 109. Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive capacity is indicated by the a. fixed factory overhead volume variance b. direct labor time variance c. direct labor rate variance d. variable factory overhead controllable variance ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. The standard factory overhead rate is $7.50 per machine hour ($6.20 for variable factory overhead and $1.30 for fixed factory overhead) based on 100% of normal capacity of 80,000 machine hours. The standard cost and the actual cost of factory overhead for the production of 15,000 units during August were as follows: Actual:

Variable factory overhead Fixed factory overhead

Standard hours allowed for units produced:

60,000 hours

$360,000 104,000

110. What is the fixed factory overhead volume variance? a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable ANSWER: RATIONALE:

d Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate Fixed Factory Overhead Volume Variance = (80,000 hours – 60,000 hours) × $1.30 = $26,000 Unfavorable Variance

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Overhead rate LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 10:50 AM

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Chapter 23 - Evaluating Variances from Standard Costs 111. What is the variable factory overhead controllable variance? a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable ANSWER: RATIONALE:

b Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $360,000 – ($6.20 variable overhead per unit × 60,000 budgeted variable factory hours) = $360,000 – $372,000 = $12,000 Favorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Overhead rate LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:03 AM 112. Incurring actual indirect factory wages in excess of budgeted amounts for actual production results in a a. quantity variance b. controllable variance c. volume variance d. rate variance ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs 113. The controllable variance measures a. operating results at less than normal capacity b. the efficiency of using variable overhead resources c. operating results at more than normal capacity d. control over fixed overhead costs ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 114. The unfavorable volume variance may be due to all of the following factors except a. failure to maintain an even flow of work b. machine breakdowns c. unexpected increases in the cost of utilities d. failure to obtain enough sales orders ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 115. Favorable volume variances may be harmful when a. machine repairs cause work stoppages b. supervisors fail to maintain an even flow of work c. production in excess of normal capacity cannot be sold d. All of these choices ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:05 AM 116. The following data are given for Bahia Company: Budgeted production Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead

1,000 units 980 units $2.00 12 11,800 $23,000 $14 per hour 4.5 4,560 $62,928

Standard variable overhead rate

$27,000 $3.50 per standard direct labor hour

Actual variable overhead costs

$15,500

Overhead is applied on standard labor hours. The variable factory overhead controllable variance is a. $65 unfavorable Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs b. $65 favorable c. $540 unfavorable d. $540 favorable ANSWER: RATIONALE:

a Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead Budgeted Variable Factory Overhead = Standard Hours for Actual Units Produced × Variable Factory Overhead Rate = 980 units × 4.5 hours × $3.50 = $15,435 Variable Factory Overhead Controllable Variance = $15,500 – $15,435 = $65 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:11 AM 117. The following data are given for Bahia Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead

1,000 units 980 units $2.00 12 11,800 $23,000 $14 per hour 4.5 4,560 $62,928

Standard variable overhead rate

$27,000 $3.50 per standard labor hour

Actual variable overhead costs

$15,500

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Chapter 23 - Evaluating Variances from Standard Costs Overhead is applied on standard labor hours. The fixed factory overhead volume variance is a. $65 unfavorable b. $65 favorable c. $540 unfavorable d. $540 favorable ANSWER: RATIONALE:

c Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate Fixed Factory Overhead Rate = Actual and Budgeted Fixed Overhead/(Standard Hours Allowed per Completed Unit × Budgeted Production at 100% Normal Capacity) = $27,000/(4.5 hours × 1,000 units) = $27,000/4,500 hours = $6 per hour Fixed Factory Overhead Volume Variance = [(1,000 units × 4.5 hours) – (980 units × 4.5 hours)] × $6 = $540 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:12 AM Use this information for Zoyza Company to answer the questions that follow. The following data are given for Zoyza Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Copyright Cengage Learning. Powered by Cognero.

26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22 per hour 6.6 183,000 Page 80

Chapter 23 - Evaluating Variances from Standard Costs Actual total labor costs Overhead: Actual and budgeted fixed overhead

$4,020,000

Standard variable overhead rate

$1,029,600 $24.50 per standard labor hour

Actual variable overhead costs

$4,520,000

Overhead is applied on standard labor hours.

118. The variable factory overhead controllable variance is a. $73,250 favorable b. $73,250 unfavorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: RATIONALE:

b Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead Budgeted Variable Factory Overhead = Standard Hours for Actual Units Produced × Variable Factory Overhead Rate = 6.6 hours × 27,500 units × $24.50 = $4,446,750 Variable Factory Overhead Controllable Variance = $4,520,000 – $4,446,750 = $73,250 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Zoyza data LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 119. The fixed factory overhead volume variance is a. $73,250 unfavorable b. $73,250 favorable c. $59,400 favorable d. $59,400 unfavorable ANSWER: RATIONALE:

c Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate Fixed Factory Overhead Rate = Actual and Budgeted Fixed Overhead/(Standard Hours Allowed per Completed Unit × Budgeted Production at 100% of Normal Capacity) = $1,029,600/(6.6 hours × 26,000 units) = $1,029,600/171,600 hours = $6 per direct labor hour Fixed Factory Overhead Volume Variance = [(26,000 units × 6.6 hours) – (27,500 units × 6.6 hours)] × $6 = (171,600 hours – 181,500 hours) × $6 = $(59,400) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Zoyza data LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:14 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information for St. Augustine Corporation to answer the questions that follow. St. Augustine Corporation originally budgeted for $360,000 of fixed overhead at 100% of normal production capacity. Production was budgeted to be 12,000 units. The standard hours for production were 5 hours per unit. The variable overhead rate was $3 per hour. Actual fixed overhead was $360,000 and actual variable overhead was $170,000. Actual production was 11,700 units. 120. The variable factory overhead controllable variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable ANSWER: RATIONALE:

c Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead Budgeted Variable Factory Overhead = Standard Hours for Actual Units Produced × Variable Factory Overhead Rate = 11,700 units × 5 hrs. × $3 = $175,500 Variable Factory Overhead Controllable Variance = $170,000 – $175,500 = $(5,500) Favorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: St. Augustine info LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:21 AM

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Chapter 23 - Evaluating Variances from Standard Costs 121. The fixed factory overhead volume variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable ANSWER: RATIONALE:

b Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate Fixed Factory Overhead Rate = Actual and Budgeted Fixed Overhead/(Standard Hours Allowed per Completed Unit × Budgeted Production at 100% of Normal Capacity) = $360,000/(5 hours × 12,000 units) = $360,000/60,000 hours = $6 per direct labor hours. Fixed Factory Overhead Volume Variance = [(12,000 units × 5 hours) – (11,700 units × 5 hours)] × $6 = (60,000 hours – 58,500 hours) × $6 = $9,000 Unfavorable Variance POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: St. Augustine info LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:24 AM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information to answer the questions that follow. Standard Actual Variable overhead rate $3.35 Fixed overhead rate $1.80 Hours 18,900 17,955* Fixed overhead $46,000 Actual variable overhead $67,430 Total factory overhead $101,450 *Actual hours are equal to standard hours for units produced.

122. The total factory overhead cost variance is a. $4,866.75 unfavorable b. $4,866.75 favorable c. $8,981.75 favorable d. $8,981.75 unfavorable ANSWER: RATIONALE:

d Total Factory Overhead Cost Variance = Variable Factory Overhead Controllable Variance + Fixed Factory Overhead Volume Variance Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $67,430 – (17,955 hours × $3.35) = $7,280.75 Unfavorable Variance Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = (18,900 hours – 17,955 hours) × $1.80 = $1,701.00 Unfavorable Variance Total Factory Overhead Cost Variance = $7,280.75 + $1,701 = $8,981.75 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cost variance LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:27 AM

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Chapter 23 - Evaluating Variances from Standard Costs 123. The fixed factory overhead volume variance is a. $1,701.00 favorable b. $4,866.75 unfavorable c. $1,701.00 unfavorable d. $4,866.75 favorable ANSWER: RATIONALE:

c Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = (18,900 hours – 17,955 hours) × $1.80 = $1,701.00 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cost variance LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:28 AM

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Chapter 23 - Evaluating Variances from Standard Costs 124. The variable factory overhead controllable variance is a. $8,981.75 favorable b. $7,280.75 unfavorable c. $8,981.75 unfavorable d. $7,280.75 favorable ANSWER: RATIONALE:

b Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $67,430 – (17,955 hours × $3.35) = $7,280.75 Unfavorable Variance POINTS: 1 DIFFICULTY: Bloom's: Applying Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Cost variance LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 11:30 AM 125. A negative fixed overhead volume variance can be caused due to all of the following except a. sales orders at a low level b. machine breakdowns c. employee inexperience d. increase in utility costs ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 12:27 PM

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Chapter 23 - Evaluating Variances from Standard Costs 126. At the end of the fiscal year, variances from standard costs are usually transferred to the a. direct labor account b. factory overhead account c. cost of goods sold account d. direct materials account ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 127. Variances from standard costs are reported to a. suppliers b. stockholders c. management d. creditors ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 128. If at the end of the fiscal year, the variances from standard are significant, the variances should be transferred to the a. work in process account b. cost of goods sold account c. finished goods account d. work in process, cost of goods sold, and finished goods accounts ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 129. Morocco Desk Co. purchases 6,000 feet of lumber at $6 per foot. The standard price for direct materials is $5. The entry to record the purchase and unfavorable direct materials price variance is a. Direct Materials Direct Materials Price Variance Accounts Payable b. Direct Materials Accounts Payable c. Direct Materials Direct Materials Price Variance Accounts Payable d. Work in Process Direct Materials Price Variance Accounts Payable ANSWER: RATIONALE:

30,000 6,000 36,000 30,000 30,000 36,000 6,000 30,000 36,000 6,000 30,000

a The entry to record the purchase and unfavorable direct materials price variance is Direct Materials (6,000 feet × $5) 30,000 Direct Materials Price Variance [($6 – $5) × 6,000 feet] 6,000 Accounts Payable (6,000 feet × $6) 36,000

POINTS: DIFFICULTY:

1 Bloom's: Applying Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 12:29 PM

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Chapter 23 - Evaluating Variances from Standard Costs

130. A company records its inventory purchases at standard cost but also records purchase price variances. The company purchas 5,000 widgets at $8.00 each, and the standard cost for the widgets is $7.60. Which of the following would be included in the jo entry? a. debit Accounts Payable, $38,000 b. credit Direct Materials Price Variance, $2,000 c. debit Accounts Payable, $2,000 d. debit Direct Materials Price Variance, $2,000 ANSWER: RATIONALE:

d The journal entry is Direct Materials (5,000 widgets × $7.60) Direct Materials Price Variance [($8.00 – $7.60) × 5,000 widgets] Accounts Payable (5,000 widgets × $8.00)

38,000 2,000

POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs Matching Match each of the following descriptions with the term (a–e) it describes. a. Ideal standard b. Nonfinancial performance measure c. Currently attainable standard d. Unfavorable cost variance e. Favorable cost variance DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCT.WARD.18.23-02 - 23-02 ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 12:34 PM 131. An example is the number of customer complaints ANSWER: b POINTS: 1 132. Actual cost > standard cost at actual volumes ANSWER: d POINTS: 1 133. Actual cost < standard cost at actual volumes ANSWER: e POINTS: 1 134. Normal standard ANSWER: c POINTS: 1 135. Theoretical standard ANSWER: a POINTS: 1

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Chapter 23 - Evaluating Variances from Standard Costs Match each of the following formulas or descriptions with the term (a–e) it defines. a. Direct materials price variance b. Direct labor rate variance c. Direct labor time variance d. Direct materials quantity variance e. Budgeted variable factory overhead DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 12:37 PM 136. (Actual Direct Hours – Standard Direct Hours) × Standard Rate per Hour ANSWER: c POINTS: 1 137. (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours ANSWER: b POINTS: 1 138. (Actual Price – Standard Price) × Actual Quantity ANSWER: a POINTS: 1 139. (Actual Quantity – Standard Quantity) × Standard Price ANSWER: d POINTS: 1 140. Standard variable overhead for actual units produced ANSWER: e POINTS: 1

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Chapter 23 - Evaluating Variances from Standard Costs Subjective Short Answer 141. Define ideal and currently attainable standards. Which type of standard should be used and why? ANSWER:

Ideal standards are standards that are only achievable under perfect operating conditions. Currently attainable standards (also called normal standards) allow for normal difficulties and mistakes. They can be attained with reasonable effort.

Companies should use currently attainable standards as employees are more likely to put forth their best effort when standards are reasonable. The use of ideal standards may have a negative impact on performance as they are likely to be viewed by employees as unrealistic. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-01 - 23-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM

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Chapter 23 - Evaluating Variances from Standard Costs 142. Compute the standard cost for one pair of boots, based on the following standards for each pair of boots: Standard material quantity: Standard labor: Factory overhead:

1.25 yards of leather at $35.00 per yard 9 hours at $25.75 per hour $1.75 per direct labor hour

Standard material: Standard labor: Factory overhead: Total standard cost

1.25 yards at $35.00 per yard 9 hours at $25.75 per hour 9 hours at $1.75 per hour

$ 43.75 231.75 15.75 $291.25

ANSWER: POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/9/2017 1:10 PM DATE MODIFIED: 3/9/2017 1:14 PM

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Chapter 23 - Evaluating Variances from Standard Costs 143. Sally’s Chocolate Company makes gourmet cupcakes that are sold by the dozen. Compute the standard cost for one dozen cupcakes, based on the following standards: Standard material quantity: Standard labor: Factory overhead:

ANSWER:

4.25 cups of ingredients at $0.56 per cup 1.10 hours at $8.30 per hour $3.80 per direct labor hour

Standard materials: 4.25 cups at $0.56 per cup Standard labor: 1.10 hours at $8.30 per hour Factory overhead: 1.10 hours at $3.80 per hour Total standard cost

$ 2.38 9.13 4.18 $15.69

POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 144. Compute the standard cost for one hat, based on the following standards for each hat: Standard material quantity: Standard labor: Factory overhead:

3/4 yard of fabric at $5.00 per yard 2 hours at $5.75 per hour $3.20 per direct labor hour

Standard material 3/4 yard at $5.00 per yard $ 3.75 Standard labor 2 hours at $5.75 per hour 11.50 Factory overhead 2 hours at $3.20 per hour 6.40 Total standard cost $21.65 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-02 - 23-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM ANSWER:

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Chapter 23 - Evaluating Variances from Standard Costs 145. Standard and actual costs for direct labor for the manufacture of 300 units of product were as follows: Actual costs Standard costs

125 hours @ $54.00 131 hours @ $53.00

Determine the direct labor (a) time variance, (b) rate variance, and (c) total cost variance. ANSWER:

(a) Actual time Standard time × Standard rate Direct labor time variance (b) Actual rate Standard rate

125 hours 131 hours (6) hours $53 $318 Favorable

× Actual time

$54.00 per hour 53.00 per hour $ 1.00 per hour 125

Direct labor time variance

$ 125 Unfavorable

$(318) Favorable 125 Unfavorable

Total direct labor cost variance $(193) Favorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/9/2017 1:33 PM DATE MODIFIED: 3/15/2017 3:13 PM

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Chapter 23 - Evaluating Variances from Standard Costs 146. Ruby Company produces a chair that requires 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 43,600 yards at a cost of $7.55 per yard. Determine the (a) price variance, (b) quantity variance, and (c) cost variance. ANSWER:

(a) Price Variance = ($7.50 – $7.55) × 43,600 = $2,180 Unfavorable (b) Quantity Variance = [(5 × 8,500) – 43,600] × $7.50 = $8,250 Unfavorable

(c) Cost Variance = $10,430 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:41 PM 147. Ruby Company produces a chair that requires 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,400 chairs were manufactured, using 43,700 yards at a cost of $7.30 per yard. Determine the (a) price variance, (b) quantity variance, and (c) total cost variance. ANSWER:

(a) Price Variance = ($7.30 – $7.50) × 43,700 = $(8,740) Favorable (b) Quantity Variance = [(5 × 8,400) – 43,700] × $7.50 = $12,750 Unfavorable

(c) Total Cost Variance = $4,010 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/15/2017 3:14 PM

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Chapter 23 - Evaluating Variances from Standard Costs 148. Ruby Company produces a chair that requires 5 yards of material per unit. The standard price of one yard of material is $7.60. During the month, 8,500 chairs were manufactured, using 40,000 yards at a cost of $7.50. Determine the (a) price variance, (b) quantity variance, and (c) total cost variance. ANSWER:

(a) Price Variance = ($7.50 – $7.60) × 40,000 = $(4,000) Favorable (b) Quantity Variance = [(8,500 × 5) – 40,000] × $7.60 = $(19,000) Favorable

(c) Total Cost Variance = $(23,000) Favorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:47 PM 149. Japan Company produces lamps that require 2.25 standard hours per unit at an hourly rate of $15.00 per hour. Production of 7,700 units required 19,250 hours at an hourly rate of $14.90 per hour. What is the direct labor (a) rate variance, (b) time variance, and (c) total cost variance? ANSWER:

(a) Rate Variance = ($14.90 – $15.00) × 19,250 = $(1,925) Favorable (b) Time Variance = [19,250 – (7,700 × 2.25)] × $15.00 = $28,875 Unfavorable

(c) Total Cost Variance = $26,950 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:48 PM

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Chapter 23 - Evaluating Variances from Standard Costs 150. Tippi Company produces lamps that require 2.25 standard hours per unit at an hourly rate of $15.00 per hour. Production of 7,700 units required 17,550 hours at an hourly rate of $15.20 per hour. What is the direct labor (a) rate variance, (b) time variance, and (c) total cost variance? ANSWER:

(a) Rate Variance = ($15.20 – $15.00) × 17,550 = $3,510 Unfavorable (b) Time Variance = [17,550 – (2.25 × 7,700)] × $15.00 = $3,375 Unfavorable

(c) Cost Variance = $6,885 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:49 PM 151. Hsu Company produces a part with a standard of 5 yards of material per unit. The standard price of one yard of material is $8.50. During the month, 8,800 parts were manufactured, using 45,700 yards of material at a cost of $8.30. Determine the (a) price variance, (b) quantity variance, and (c) cost variance. ANSWER:

(a) Price Variance = ($8.30 – $8.50) × 45,700 = $(9,140) Favorable (b) Quantity Variance = [45,700 – (5 × 8,800)] × $8.50 = $14,450 Unfavorable

(c) Total Cost Variance = $5,310 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:50 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs 152. Aquatic Corp.’s standard material requirement to produce one Model 2000 is 15 pounds of material at $110 per pound. Last month, Aquatic purchased 170,000 pounds of material at a total cost of $17,850,000. It used 162,000 pounds to produce 10,000 units of Model 2000. Calculate the materials price variance and materials quantity variance, and indicate whether each variance is favorable or unfavorable. ANSWER:

Actual Cost = $17,850,000/170,000 pounds = $105 per pound Materials Price Variance = ($105 – $110) × 170,000 = $(850,000) Favorable

Materials Quantity Variance = [162,000 – (15 × 10,000)] × $110 = $1,320,000 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:51 PM

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Chapter 23 - Evaluating Variances from Standard Costs Use this information for Taylor Company to answer the questions that follow. The following data are given for Taylor Company: Budgeted production Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs

1,000 units 980 units $2.00 12 11,800 $23,000 $14.00 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard labor hour $15,500

Overhead is applied based on standard labor hours.

153. Compute the direct materials price and quantity variances for Taylor Company. ANSWER:

Direct materials price variance: $23,000 – ($2.00 × 11,800) = $(600) Favorable

Direct materials quantity variance: [11,800 – (980 × 12)] × $2.00 = $80 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Taylor Company LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:53 PM

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Chapter 23 - Evaluating Variances from Standard Costs 154. Compute the direct labor rate and time variances for Taylor Company. ANSWER:

Direct labor rate variance: $62,928 – ($14.00 × 4,560) = $(912) Favorable

Direct labor time variance: [4,560 – (980 × 4.5)] × $14.00 = $2,100 Unfavorable POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False PREFACE NAME: Taylor Company LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 1:54 PM

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Chapter 23 - Evaluating Variances from Standard Costs 155. Standard and actual costs for direct materials for the manufacture of 1,000 units of product were as follows: Actual costs Standard costs

1,550 lb. at $9.10 1,600 lb. at $9.00

Determine the direct materials (a) quantity variance, (b) price variance, and (c) total cost variance. ANSWER:

(a) Actual quantity Standard quantity × Standard price

1,550 lb. 1,600 lb. 50 lb. × $9.00 $(450) Favorable

(b) Actual price

$9.10 per lb.

Standard price

9.00 per lb. $0.10 per lb.

× Actual quantity

× 1,550 $155 Unfavorable

$(450) Favorable 155 Unfavorable $(295) Favorable

POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 156. Standard and actual costs for direct labor for the manufacture of 1,000 units of product were as follows: Actual costs Standard costs

950 hours at $37 975 hours at $36

Determine the direct labor (a) time variance, (b) rate variance, and (c) total direct labor cost variance. ANSWER:

(a) Actual time Standard time × Standard rate (b) Actual rate Standard rate × Actual time

950 hours 975 hours 25 hours $36 $(900) Favorable $

37 per hour 36 per hour $ 1 per hour × 950 $ 950 Unfavorable

$(900) Favorable 950 Unfavorable $50 Unfavorable

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/15/2017 3:17 PM 157. The following information is for the standard and actual costs for Happy Corporation: Standard Costs: Budgeted units of production - 16,000 [80% (or normal) capacity] Standard labor hours per unit - 4 Standard labor rate - $26 per hour Standard material per unit - 8 lb. Standard material cost - $12 per pound Standard variable overhead rate - $15 per labor hour Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs Budgeted fixed overhead - $640,000 Fixed overhead rate is based on budgeted labor hours at 80% (or normal) capacity. Actual Cost: Actual production - 16,500 units Actual material purchased and used - 130,000 pounds Actual total material cost - $1,600,000 Actual labor - 65,000 hours Actual total labor costs - $1,700,000 Actual variable overhead - $1,000,000 Actual fixed overhead - $640,000 Determine: (a) the direct materials quantity variance, price variance, and total cost variance; (b) the direct labor time variance, rate variance, and total cost variance; and (c) the factory overhead volume variance, controllable variance, and total factory overhead cost variance. (Note: If following text formulas, do not round interim calculations.) ANSWER:

(a) Direct materials: Quantity variance: Actual quantity × Standard price: (130,000 × $12)

$ 1,560,000

Standard quantity × Standard price: (16,500 × 8 × $12)

1,584,000

Quantity variance (favorable) Price variance: Actual total price Actual quantity × Standard price: (130,000 × $12) Price variance (unfavorable) Total cost variance: Price variance (unfavorable) Quantity variance (favorable) Total (unfavorable)

$ (24,000)

$1,600,000 1,560,000 $ 40,000

$40,000 (24,000) $16,000

(b) Direct labor: Time variance: Actual hours × Standard rate: (65,000 × $26)

$1,690,000

Standard hours × Standard rate: (16,500 × 4 × $26)

1,716,000 $ (26,000)

Time variance (favorable) Rate variance: Actual labor costs Actual hours × Standard rate (65,000 × $26) Rate variance (unfavorable)

$1,700,000 1,690,000 $ 10,000

Total cost variance: Time variance (favorable) Rate variance (unfavorable)

$(26,000) 10,000

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Chapter 23 - Evaluating Variances from Standard Costs Total (favorable)

$16,000

(c) Factory overhead: Volume variance: Actual fixed overhead Applied fixed overhead [(16,500 × 4) × ($640,000/64,000)] Volume variance (favorable)

660,000 $(20,000)

Controllable variance: Actual variable overhead Applied variable overhead [(16,500 × 4) × $15] Controllable variance (unfavorable)

$1,000,000 990,000 $ 10,000

Total cost variance: Volume variance (favorable) Controllable variance (unfavorable) Total (favorable)

$(20,000) 10,000 $(10,000)

$640,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-03 - 23-03 ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/15/2017 3:19 PM 158. The Finishing Department of Pinnacle Manufacturing Co. prepared the following factory overhead cost budget for October of the current year, during which it expected to operate at a 100% capacity of 10,000 machine hours. Variable costs: Indirect factory wages Power and light Indirect materials Total variable cost Fixed costs: Supervisory salaries Depreciation of plant and equipment Copyright Cengage Learning. Powered by Cognero.

$18,000 12,000 4,000 $34,000 $12,000 8,800 Page 108

Chapter 23 - Evaluating Variances from Standard Costs 3,200

Insurance and property taxes Total fixed cost Total factory overhead

24,000 $58,000

During October, the plant was operated for 9,000 machine hours and the factory overhead costs incurred were as follows: indirect factory wages, $16,400; power and light, $10,000; indirect materials, $3,000; supervisory salaries, $12,000; depreciation of plant and equipment, $8,800; insurance and property taxes, $3,200. Prepare a factory overhead cost variance report for October. (The budgeted amounts for actual amount produced should be based on 9,000 machine hours.) ANSWER: Pinnacle Manufacturing Co.—Finishing Department Factory Overhead Cost Variance Report For the Month Ended October 31 Productive capacity for the month

10,000 hours

Actual production for the month

9,000 hours

Variances Budget

Actual Favorable Unfavorable

Variable factory overhead costs: Indirect factory wages

$16,200 $16,400

Power and light

10,800

10,000

$ (800)

Indirect materials

3,600

3,000

(600)

Total variable factory overhead cost

$200

$30,600 $29,400

Fixed factory overhead costs: Supervisory salaries

$12,000 $12,000

Depreciation of plant and equipment

8,800

Insurance and property taxes

3,200

Total fixed factory overhead cost Total factory overhead cost Total controllable variances

$24,000 $24,000 $54,600 $53,400 $(1,400)

$200

Net controllable Net controllable variance— favorable

$(1,200)

Volume variance—unfavorable: Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs Idle hours at the standard rate for fixed overhead (1,000 × $2.40)

2,400

Total factory overhead cost variance —unfavorable

$1,200

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:05 PM 159. Tucker Company produced 8,900 units of product that required 3.25 standard hours per unit. The standard variable overhead cost per unit is $4.00 per hour. The actual variable factory overhead was $111,000. Determine the variable factory overhead controllable variance. ANSWER:

The variable factory overhead controllable variance is $(4,700) Favorable. [(8,900 × 3.25 × $4.00) – $111,000] POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:05 PM

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Chapter 23 - Evaluating Variances from Standard Costs 160. Titus Company produced 8,900 units of a product that required 3.25 standard hours per unit. The standard fixed overhead cost per unit is $1.20 per hour at 29,000 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance. ANSWER:

The fixed factory overhead volume variance is $90 Unfavorable.

[29,000 hours – (8,900 units × 3.25 hours)] × $1.20 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:06 PM 161. Greyson Company produced 8,300 units of product that required 4.25 standard hours per unit. Determine the fixed factory overhead rate at 27,000 hours, which is 100% of normal capacity, if the favorable fixed factory overhead volume variance is $14,895. ANSWER:

[(8,300 × 4.25) – 27,000] × X = $(14,895) Favorable

X = $1.80 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:07 PM

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Chapter 23 - Evaluating Variances from Standard Costs 162. The following information relates to manufacturing overhead for Chapman Company: Standard: Total fixed factory overhead - $450,000 Estimated production - 25,000 units (100% of normal capacity) Overhead rates are based on machine hours. Standard hours allowed per unit produced - 2 Fixed overhead rate - $9.00 per machine hour Variable overhead rate - $3.50 per hour Actual: Fixed factory overhead - $450,000 Production - 24,000 units Variable overhead - $170,000 Compute (a) the fixed factory overhead volume variance, (b) the variable factory overhead controllable variance, and (c) the total factory overhead cost variance. ANSWER:

(a) Productive capacity of 25,000 units Standard for product produced (24,000 units) Productive capacity not used Standard fixed factory overhead cost rate Volume variance (unfavorable) (b) Actual variable overhead incurred Budgeted factory overhead for standard units produced (applied) (24,000 × 2 × $3.50) Controllable variance (unfavorable)

50,000 hours 48,000 hours 2,000 hours × $9.00 per hour $18,000

$170,000

168,000 $ 2,000

(c) Volume variance (unfavorable) $18,000 Controllable variance (unfavorable) 2,000 Cost variance (unfavorable) $20,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:10 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs 163. Using the following information, prepare a factory overhead cost budget for Andover Company where the total factory overhead cost is $75,500 at normal capacity (100%). Include capacity at 75%, 90%, 100%, and 110%. Total variable cost is $6.25 per unit and total fixed costs are $38,000. The information is for the month ended August 31. (Hint: Determine units produced at normal capacity.) ANSWER: Andover Company Factory Overhead Cost Budget For the Month Ending August 31 Percent of normal capacity 75% 90% Units produced 4,500 5,400 Variable costs per unit $6.25 Fixed costs Total factory overhead cost

100% X

110% 6,600

$28,125 $33,750 $37,500 $41,250 38,000 38,000 38,000 38,000 $66,125 $71,750 $75,500 $79,250

X = $37,500/$6.25 X = 6,000 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-04 - 23-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:11 PM

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Chapter 23 - Evaluating Variances from Standard Costs 164. Using the following information, prepare a factory overhead cost budget for Jacob Company where the total factory overhead cost is $206,500 at normal capacity (100%). Include capacity at 60%, 80%, 100%, and 120%. Total variable cost is $15.25 per unit, and total fixed costs are $54,000. The information is for the month ended October 31. (Hint: Determine units produced at normal capacity.)

ANSWER:

Jacob Company Factory Overhead Cost Budget For the Month Ending October 31 Percent of normal 60% 80% 100% capacity Units produced 6,000 8,000 10,000 Variable costs per unit $15.25 Fixed costs Total factory overhead cost X = $152,500/$15.25 X = 10,000 units

120% 12,000

$ 91,500 $122,000 $152,500 $183,000 54,000 54,000 54,000 54,000 $145,500 $176,000 $206,500 $237,000

POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 165. Titus Company purchased on account and used 650 pounds of tomatoes (direct materials) to produce a taco sauce with a 635-pound standard direct materials requirement. The standard materials price is $22.40 per pound. The actual price of the tomatoes was $22.20 per pound. Prepare the journal entries to record (1) the purchase of the tomatoes and (2) the tomatoes entering production. Titus records standards and variances in the general ledger. ANSWER:

Materials (650 ×$22.40) Direct Materials Price Variance Accounts Payable (650 ×$22.20)

14,560

Work in Process (635 ×$22.40) Direct Materials Quantity Variance Materials

14,224 336

130 14,430

14,560

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/9/2017 2:12 PM DATE MODIFIED: 3/15/2017 3:20 PM 166. Prepare an income statement (through income before income tax) for presentation to management, using the following data from the records of Greenway Manufacturing Company for November of the current year: Administrative expenses Cost of goods sold (at standard) Direct materials quantity variance—favorable Direct materials price variance—favorable Direct labor time variance—unfavorable Direct labor rate variance—favorable Factory overhead volume variance—unfavorable Factory overhead controllable variance—favorable Sales Selling expenses

$ 73,500 470,000 1,200 2,400 900 500 10,000 1,500 950,000 165,800

ANSWER: Greenway Manufacturing Company Income Statement For Month Ended November 30 Sales Copyright Cengage Learning. Powered by Cognero.

$950,000 Page 115

Chapter 23 - Evaluating Variances from Standard Costs Cost of goods sold—at standard

470,000

Gross profit—at standard

$480,000 FavorableUnfavorable

Less variances from standard cost: Direct materials price

$(2,400)

Direct materials quantity

(1,200)

Direct labor rate

(500) $ 900

Direct labor time Factory overhead controllable Factory overhead volume

(1,500) 10,000

5,300 $474,700

Gross profit Operating expenses: Selling expenses

$165,800

Administrative expenses

73,500 239,300

Income before income tax

$235,400

POINTS: DIFFICULTY:

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Chapter 23 - Evaluating Variances from Standard Costs 167. Oak Company produces a chair that requires 6 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 48,875 yards. Journalize the entry to record the standard direct materials used in production. ANSWER:

Work in Process (8,500 × 6 × $7.50)

382,500.00

Direct Materials Quantity Variance [(48,875 – 51,000) × $7.50]

15,937.50

Materials (48,875 × $7.50)

366,562.50

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM 168. Prepare an income statement for the year ended December 31, through the gross profit for Baxter Company using the following information. Baxter Company sold 8,600 units at $125 per unit. Normal production is 9,000 units. (Do not round fixed overhead rate calculation when determining fixed factory overhead volume variance.) Standard: 5 yards per unit at $6.30 per yard Standard: 2.25 hours per unit at $15.00

Actual yards used: 43,240 yards at $6.25 per yard Actual hours worked: 19,100 at $14.90 per hour

Standard: variable overhead $1.05 per unit Standard: fixed overhead $211,500 (budgeted and actual amount)

Actual total factory overhead: $235,500

ANSWER: Baxter Company Income Statement Through Gross Profit For the Year Ended December 31 $1,075,000

Sales Cost of goods sold—at standard*

772,280

Gross profit—at standard

$ 302,720 FavorableUnfavorable

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Chapter 23 - Evaluating Variances from Standard Costs Less variances from standard cost: Direct materials price

$(2,162)

Direct materials quantity

$ 1,512

Direct labor rate

(1,910)

Direct labor time

(3,750)

Factory overhead controllable

14,970

Factory overhead volume

9,400

Gross profit—actual

18,060

$ 284,660

*[(5 × $6.30) + (2.25 × $15.00) + $1.05 + ($211,500/9,000)] × 8,600 units POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:28 PM

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Chapter 23 - Evaluating Variances from Standard Costs 169. A company records inventory purchases at standard cost and also records purchase price variances. Prepare the journal entry for a purchase of 6,000 widgets that were bought at $8.00 and have a standard cost of $8.15. ANSWER:

Materials (6,000 × $8.15) Direct Materials Price Variance Accounts Payable (6,000 × $8.00)

48,900 900 48,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:30 PM 170. If a company records inventory purchases at standard cost and also records purchase price variances, prepare the journal entry for a purchase of widgets that were bought at $7.45 per unit and have a standard cost of $7.15. The total amount owed to the vendor for this purchase is $33,525. ANSWER:

Materials (4,500 × $7.15) Direct Materials Price Variance Accounts Payable (4,500 × $7.45)

32,175 1,350 33,525

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/9/2017 2:32 PM

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Chapter 23 - Evaluating Variances from Standard Costs 171. Robin Company purchased on account and used 520 pounds of direct materials to produce a product with a 510pound standard direct materials requirement. The standard materials price is $2.10 per pound. The actual materials price was $2.00 per pound. Prepare the journal entries to record (1) the purchase of the materials and (2) the material entering production. ANSWER:

Materials (520 × $2.10) Direct Materials Price Variance Accounts Payable (520 × $2.00)

1,092 52 1,040

Work in Process (510 × $2.10) 1,071 Direct Materials Quantity Variance 21 Materials 1,092 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/10/2017 8:06 AM 172. Rosser Company produces a container that requires 4 yards of material per unit. The standard price of one yard of material is $4.50. During the month, 9,500 chairs were manufactured using 37,300 yards of material. Journalize the entry to record the standard direct materials used in production. ANSWER:

Work in Process (9,500 × 4 × $4.50) Direct Materials Quantity Variance Materials (37,300 × $4.50)

171,000 3,150 167,850

POINTS: DIFFICULTY:

1 Bloom's: Applying Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs 173. Robin Company purchased on account and used 500 pounds of direct materials to produce a product with a 520pound standard direct materials requirement. The standard materials price is $1.90 per pound. The actual materials price was $2.00 per pound. Prepare the journal entries to record (1) the purchase of the materials and (2) the material entering production. ANSWER:

Materials (500 × $1.90) Direct Materials Price Variance (500 × $0.10) Accounts Payable (500 × $2.00)

950 50 1,000

Work in Process (520 × $1.90) 988 Direct Materials Quantity Variance 38 Materials 950 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-05 - 23-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/10/2017 8:07 AM 174. Define nonfinancial performance measures. What are they used for and what are some common examples? ANSWER:

Nonfinancial performance measures evaluate company outcomes in a measure other than dollars. They are used to evaluate the time, quality, or quantity of a business activity and bring additional perspective to performance evaluation.

Common examples include inventory turnover, percent of on-time delivery, employee satisfaction, and number of customer complaints. POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/1/2017 1:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23 - Evaluating Variances from Standard Costs 175. The following are inputs and outputs to the help desk: Operator training Number of calls per day Maintenance of computer equipment Number of operators Number of complaints Identify whether each is an input or an output to the help desk. ANSWER:

Operator training – input Number of calls per day – output Maintenance of computer equipment – input Number of operators – input Number of complaints – output POINTS: 1 DIFFICULTY: Moderate Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.23-06 - 23-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:21 PM DATE MODIFIED: 3/10/2017 8:07 AM

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Chapter 24 - Decentralized Operations True / False 1. Separation of businesses into more manageable operating units is termed decentralization. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 2. The process of measuring and reporting operating data by responsibility centers is termed responsibility accounting. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 24 - Decentralized Operations 3. A decentralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 4. A centralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 24 - Decentralized Operations 5. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 6. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 24 - Decentralized Operations 7. One of the advantages of decentralization is that delegating authority to managers closest to the operation always results in better decisions. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:03 PM 8. Developing and retaining quality managers are advantages of decentralization. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 24 - Decentralized Operations 9. A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 10. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 5

Chapter 24 - Decentralized Operations 11. In an investment center, the manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the plant assets invested in the center. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 12. Budget performance reports prepared for the vice president of production would generally contain less detail than reports prepared for the various plant managers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 6

Chapter 24 - Decentralized Operations 13. The amount of detail presented in a budget performance report for a cost center depends on the level of management to which the report is directed. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 24 - Decentralized Operations 15. Responsibility accounting reports that are given to lower-level managers are usually very detailed; in turn, higherlevel managers will be given a summary report. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:05 PM 16. A manager in a cost center also has responsibility and authority over the revenues. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 8

Chapter 24 - Decentralized Operations 17. The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in their plants. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 18. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed direct operating expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 9

Chapter 24 - Decentralized Operations 19. Sales commission expense for a department store is an example of a direct expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 20. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 10

Chapter 24 - Decentralized Operations 21. Office salaries expense for a department store is an indirect expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 22. The underlying principle of allocating direct operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 11

Chapter 24 - Decentralized Operations 23. Property tax expense for a department store's store equipment is an example of a direct expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Challenging Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 24. Depreciation expense on store equipment for a department store is an indirect expense. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 12

Chapter 24 - Decentralized Operations 25. Responsibility accounting reports for profit centers are normally in the form of income statements. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 26. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 13

Chapter 24 - Decentralized Operations 27. The profit center income statement should include only revenues and expenses that are controlled by the manager. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 28. The manager of the Furniture Department of a leading retailer does not control the salaries of departmental personnel. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 14

Chapter 24 - Decentralized Operations 29. Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 30. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of activity bases. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 15

Chapter 24 - Decentralized Operations 31. The rates at which centralized services are charged to each division are called service department charge rates. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 32. The profit center income statement should include only controllable revenues and expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 24 - Decentralized Operations 33. Controllable expenses are those that can be influenced by the decisions of the profit center management. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 34. Three measures of investment center performance are income from operations, return on investment, and residual income. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 17

Chapter 24 - Decentralized Operations 35. The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 36. If Division Q's yearly income from operations is $30,000 on invested assets of $200,000, the return on investment is 15%. a. True b. False ANSWER: RATIONALE:

True Return on Investment (ROI) = Income from Operations/Invested Assets = $30,000/$200,000 = 15%

POINTS: DIFFICULTY:

Page 18

Chapter 24 - Decentralized Operations 37. The return on investment may be computed by multiplying investment turnover by the profit margin. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 38. If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Return on Investment = Profit Margin × Investment Turnover = 0.08 × 1.2 = 9.6% 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:06 PM

Page 19

Chapter 24 - Decentralized Operations 39. If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Return on Investment = Profit Margin × Investment Turnover = 0.11 × 1.5 = 16.5% 1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 40. Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each sales dollar. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 20

Chapter 24 - Decentralized Operations 41. The ratio of sales to investment is termed the return on investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 42. The major advantage of the return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 21

Chapter 24 - Decentralized Operations 43. By using the return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall return for the company. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 44. The excess of divisional income from operations over a minimum acceptable income from operations is termed the residual income. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 22

Chapter 24 - Decentralized Operations 45. The minimum accepted divisional income from operations is set by top management by establishing a maximum return considered acceptable for invested assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 46. The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also the total magnitude of income from operations earned by each division. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 23

Chapter 24 - Decentralized Operations 47. The ratio of income from operations to sales is termed the profit margin component of the return on investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 48. The ratio of sales to invested assets is termed the investment turnover component of the return on investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 24

Chapter 24 - Decentralized Operations 49. If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Profit Margin = Income from Operations/Sales = $5,000/$30,000 = 16.67% 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 50. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Profit Margin = Income from Operations/Sales = $6,000/$30,000 = 20% 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 25

Chapter 24 - Decentralized Operations 51. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 1.2. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Investment Turnover = Sales/Invested Assets = $30,000/$25,000 = 1.2 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 52. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Investment Turnover = Sales/Invested Assets = $30,000/$25,000 = 1.2 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

Page 26

Chapter 24 - Decentralized Operations 53. If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

False Investment Turnover = Sales/Invested Assets = $263,750/$187,500 = 1.41 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 54. If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Investment Turnover = Sales/Invested Assets = $975,000/$750,000 = 1.3 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 55. If divisional income from operations is $75,000, invested assets are $737,500, and the minimum return on invested assets is 6%, the residual income is $36,750. a. True b. False ANSWER:

False

RATIONALE:

Income from operations

$75,000

Less: Minimum acceptable income from operations as a percent of invested assets ($737,500 × 6%)

44,250

Residual income

$30,750

POINTS: DIFFICULTY:

Page 28

Chapter 24 - Decentralized Operations 56. If divisional income from operations is $100,000, invested assets are $850,000, and the minimum return on invested assets is 8%, the residual income is $68,000. a. True b. False ANSWER:

False

RATIONALE:

Income from operations

$100,000

Less: Minimum acceptable income from operations as a percent of invested assets ($850,000 × 8%)

68,000

Residual income

$ 32,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 57. The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 29

Chapter 24 - Decentralized Operations 58. In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 59. The minimum acceptable divisional income from operations is set by top management by establishing a minimum return considered acceptable for invested assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 30

Chapter 24 - Decentralized Operations 60. A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 61. The DuPont formula uses financial information to measure the performance of a business. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 62. The DuPont formula uses financial and nonfinancial information to measure the performance of a business. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 63. The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of the business. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 32

Chapter 24 - Decentralized Operations 64. The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 65. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 66. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 67. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 68. The negotiated price approach allows the managers of decentralized units to agree on the transfer price. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 69. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 70. The cost price approach for transfer pricing is most often used between responsibility centers organized as cost centers that are not concerned with the revenue. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Multiple Choice 71. Which of the following would be most effective in a small owner-manager-operated business? a. profit centers b. centralization c. investment centers d. cost centers ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 72. Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be a. decentralized b. consolidated c. diversified d. centralized ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 73. Which of the following is not a disadvantage of a decentralized operation? a. competition among managers b. duplication of operations c. price cutting by departments that are competing in the same product market d. top management freed from everyday tasks to do strategic planning ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 74. Which of the following is the best example of a decentralized operation? a. one owner who prepares, plans, and makes decisions for the entire company b. each unit is responsible for its own operations and decision making c. in a major company, operating decisions are made by top management d. None of these choices ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 75. All of the following are advantages of decentralization except a. managers make better decisions when closer to the operations of the company b. expertise in all areas of the business is difficult; decentralization makes it better to delegate certain responsibilities c. each decentralized operation purchases its own assets and pays for operating costs d. decentralized managers can respond quickly to customer needs ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 76. Which of the following is not one of the common types of responsibility centers? a. cost center b. profit center c. investment center d. revenue center ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 77. Which of the following is a disadvantage of decentralization? a. Decisions made by one manager may negatively affect the profitability of the entire company. b. Decentralization helps retain quality managers. c. Managers closest to the operations make decisions. d. Managers are able to acquire expertise in their areas of responsibility. ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 78. A manager is responsible for costs only in a(n) a. profit center b. investment center c. volume center d. cost center ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 79. In a cost center, the manager has responsibility and authority for making decisions that affect a. revenues b. investments in assets c. both costs and revenues d. costs ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 80. A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n) a. profit center b. investment center c. volume center d. cost center ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 81. For higher levels of management, responsibility accounting reports a. are more detailed than for lower levels of management b. are more summarized than for lower levels of management c. contain about the same level of detail as reports for lower levels of management d. are rarely provided or reviewed ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 82. Most manufacturing plants are considered cost centers because they have control over a. sales and costs b. fixed assets and costs c. costs only d. fixed assets and sales ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 83. Which of the following is a measure of a cost center manager’s performance? a. budget performance report b. return and residual income measures c. divisional income statements d. balance sheet ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 84. In a profit center, the department manager has responsibility for and the authority to make decisions that affect a. not only costs and revenues, but also assets invested in the center b. the assets invested in the center, but not costs and revenues c. both costs and revenues for the department or division d. costs and assets invested in the center, but not revenues ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 85. Which of the following expenses incurred by the Sporting Goods Department of a department store is a direct expense? a. depreciation expense—office equipment b. insurance on inventory of sporting goods c. uncollectible accounts expense d. office salaries ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 86. Which of the following expenses incurred by a department store is an indirect expense? a. insurance on merchandise inventory b. sales salaries c. depreciation on store equipment d. salary of vice president of finance ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 87. In a profit center, the manager has responsibility and authority for making decisions that affect a. long-term liabilities b. assets c. investments d. costs ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 88. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are a. miscellaneous administrative expenses b. direct operating expenses c. indirect expenses d. fixed expenses ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 89. In evaluating the profit center manager, the income from operations should be compared a. across profit centers b. to historical performance or budget c. to the competitor's net income d. to the total company earnings per share ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 90. Income from operations of the Pierce Automobile Division is $2,225,000. If income from operations before service department charges is $3,250,000, a. operating expenses are $1,025,000 b. total service department charges are $1,025,000 c. noncontrollable charges are $1,025,000 d. direct manufacturing charges are $1,025,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Total Service Department Charges = $3,250,000 – $2,225,000 = $1,025,000 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 91. The costs of services charged to a profit center on the basis of its use of those services are a. operating expenses b. noncontrollable charges c. service department charges d. activity charges ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 92. Division A reported income from operations of $975,000 and total service department charges of $675,000. As a result, a. net income was $300,000 b. the gross profit margin was $300,000 c. income from operations before service department charges was $1,650,000 d. consolidated net income was $300,000 ANSWER: RATIONALE:

c Income from Operations Before Service Department Charges = Income from Operations + Total Service Department Charges = $975,000 + $675,000 = $1,650,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 93. To calculate income from operations, total service department charges are a. added to income from operations before service department charges b. subtracted from operating expenses c. subtracted from income from operations before service department charges d. subtracted from gross profit margin ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 94. Income from operations for Division L is $250,000, total service department charges are $400,000, and operating expenses are $2,750,000. What are the revenues for Division L? a. $650,000 b. $3,000,000 c. $3,400,000 d. $2,750,000 ANSWER:

RATIONALE:

Income from operations Add: Service department charges Add: Operating expenses

$ 250,000 400,000 2,750,000

Revenues

$3,400,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 95. Income from operations for Division H is $220,000, and income from operations before service department charges is $975,000. As a result, a. total operating expenses are $565,000 b. total manufacturing expenses are $565,000 c. direct materials, direct labor, and factory overhead total $565,000 d. total service department charges are $755,000 ANSWER: RATIONALE:

d Total Service Department Charges = Income from Operations Before Service Department Charges – Income from Operations = $975,000 – $220,000 = $755,000 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 96. The following data are taken from the management accounting reports of Dulcimer Co.: Division A $1,900,000 1,700,000

Income from operations Total service department charges

Division B $1,450,000 1,050,000

Division C $1,450,000 1,100,000

If an incentive bonus is paid to the manager who achieved the highest income from operations before service department char follows that a. Division A's manager is given the bonus b. Division B's manager is given the bonus c. Division C's manager is given the bonus d. Division B's and Division C's managers divide the bonus ANSWER:

RATIONALE: Income from operations Add: Total service department charges Income from operations before service department charges

Division A 1,900,000 1,700,000

Division B 1,450,000 1,050,000

Division C 1,450,000 1,100,000

3,600,000

2,500,000

2,550,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 97. The term used to describe expenses that are incurred by a specific department is a. indirect expenses b. margin expenses c. departmental expenses d. direct expenses ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations Use this information for Train Corporation to answer the questions that follow. The following financial information was summarized from the accounting records of Train Corporation for the current year ended December 31: Rails Locomotive Division Division $ 47,200 $30,720 27,200 20,040 108,000 78,000

Cost of goods sold Direct operating expenses Sales Interest expense General overhead

Corporate Total

$ 2,040 18,160 4,700

Income tax 98. The income from operations for the Rails Division is a. $60,800 b. $33,600 c. $8,700 d. $21,150 ANSWER:

RATIONALE:

Sales Less: Cost of goods sold Gross profit Less: Direct operating expenses

$108,000 47,200 $ 60,800 27,200

Income from operations

$ 33,600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Train Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 99. The gross profit for the Rails Division is a. $60,800 b. $33,600 c. $8,700 d. $21,150 ANSWER:

RATIONALE:

Sales Less: Cost of goods sold

$108,000 47,200

Gross profit

$ 60,800

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 100. The gross profit for the Locomotive Division is a. $57,960 b. $14,790 c. $27,240 d. $47,280 ANSWER:

RATIONALE:

Sales Less: Cost of goods sold

$78,000 30,720

Gross profit

$47,280

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 101. The income from operations for the Locomotive Division is a. $57,960 b. $14,790 c. $27,240 d. $47,280 ANSWER:

RATIONALE:

Sales Less: Cost of goods sold Gross profit Less: Direct operating expenses

$78,000 30,720 $47,280 20,040

Income from operations

$27,240

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 102. The net income for Train Corporation is a. $83,180 b. $35,940 c. $48,390 d. $60,840 ANSWER:

RATIONALE: Sales Less: Cost of goods sold Gross profit Less: Direct operating expenses Income from operations Less: Interest expense General overhead Income tax

Rails Division $108,000 47,200 $ 60,800 27,200 $ 33,600

Locomotive Division $78,000 30,720 $47,280 20,040 $27,240

Net income

Corporate Total

$60,840 2,040 18,160 4,700 $35,940

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Train Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 103. Responsibility accounting reports for profit centers will include a. costs only b. revenues only c. expenses and fixed assets d. revenues, expenses, and net income or loss from operations ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 104. Some organizations use internal service departments to provide like services to several divisions or departments within an organization. Which of the following would probably not lend itself as a service department? a. inventory control b. payroll accounting c. information systems d. human resources ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 105. Which of the following is a measure of a manager’s performance working in a profit center? a. a balance sheet b. the return on investment and residual income measures c. a budget performance report d. the divisional income statements ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:11 PM 106. Which of the following would not be considered an internal centralized service department? a. Payroll Accounting Department b. Manufacturing Department c. Information Systems Department d. Purchasing Department ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations Use this information for ABC Corporation to answer the questions that follow. ABC Corporation has three service departments with the following costs and activity base:

Service Department Graphics Production Accounting Personnel

Cost $200,000 500,000 400,000

Activity Base for Allocation number of copies made number of invoices processed number of employees

ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost and activity information is as follows:

Direct operating expenses

Micro $700,000 $50,000

Macro $850,000 $70,000

Super $650,000 $100,000

Number of copies made

20,000

30,000

50,000

Number of invoices processed

700

800

500

Number of employees

130

145

125

Direct revenues

107. What is the service department charge rate for Graphics Production? a. $2 b. $10 c. $6.66 d. $0.50 ANSWER: RATIONALE:

a Graphics Production Department Charge Rate = Graphics Production Department Expense/Total Graphics Production Department Usage = $200,000/(20,000 + 30,000 + 50,000) = $2 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: ABC Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations 108. What is the service department charge rate for the Accounting Department? a. $714 b. $250 c. $625 d. $0.004 ANSWER: RATIONALE:

b Accounting Department Charge Rate = Accounting Department Expense/Total Accounting Department Usage = $500,000/(700 + 800 + 500) = $250 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: ABC Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 109. What is the service department charge rate for the Personnel Department? a. $2,758 b. $3,200 c. $3,077 d. $1,000 ANSWER: RATIONALE:

d Personnel Department Charge Rate = Personnel Department Expense/Total Personnel Department Usage = $400,000/(130 + 145 + 125) = $1,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: ABC Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations 110. How much service department cost will be allocated to the Micro Division? a. $200,000 b. $145,000 c. $60,000 d. $345,000 ANSWER:

RATIONALE:

Service Department Charge = Service Usage × Service Department Charge Rate Service department cost allocated to Micro Division: Graphics Production ($2 × 20,000 copies) $ 40,000 Accounting ($250 × 700 invoices) 175,000 Personnel ($1,000 × 130 employees) 130,000 Total

$345,000

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: ABC Corporation LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 111. How much service department cost would be allocated to the Macro Division? a. $405,000 b. $175,000 c. $130,000 d. $305,000 ANSWER:

RATIONALE:

Service Department Charge = Service Usage × Service Department Charge Rate Service department cost allocated to Macro Division: Graphics Production ($2 × 30,000 copies) $ 60,000 Accounting ($250 × 800 invoices) 200,000 Personnel ($1,000 × 145 employees) 145,000 Total

$405,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 112. What will the income of the Micro Division be after all service department allocations? a. $305,000 b. $650,000 c. $345,000 d. $610,000 ANSWER:

RATIONALE:

Direct revenues Less: Direct operating expenses Income before service department charges Less: Service department cost allocated to Micro Division: Graphics Production ($2 × 20,000 copies) $ 40,000 Accounting ($250 × 700 invoices) 175,000 Personnel ($1,000 × 130 employees) 130,000

$700,000 50,000 $650,000

Income after service department charges

$305,000

345,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 113. How much service department cost would be allocated to the Super Division? a. $350,000 b. $100,000 c. $125,000 d. $550,000 ANSWER:

RATIONALE:

Service Department Charge = Service Usage × Service Department Charge Rate Service department cost allocated to Super Division: Graphics Production ($2 × 50,000 copies) $100,000 Accounting ($250 × 500 invoices) 125,000 Personnel ($1,000 × 125 employees) 125,000 Total service department charges

$350,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 114. What will the income of the Macro Division be after all service department allocations? a. $780,000 b. $375,000 c. $575,000 d. $435,000 ANSWER:

RATIONALE:

Direct revenues Less: Direct operating expenses Income before service department charges Less: Service department cost allocated to Macro Division: Graphics Production ($2 × 30,000 copies) $ 60,000 Accounting ($250 × 800 invoices) 200,000 Personnel ($1,000 × 145 employees) 145,000

$850,000 70,000 $780,000

Income after service department charges

$375,000

405,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 115. What will the income of the Super Division be after all service department allocations? a. $300,000 b. $325,000 c. $550,000 d. $200,000 ANSWER:

RATIONALE:

Direct revenues Less: Direct operating expenses Income before service department charges Less: Service department cost allocated to Super Division: Graphics Production ($2 × 50,000 copies) $100,000 Accounting ($250 × 500 invoices) 125,000 Personnel ($1,000 × 125 employees) 125,000

$650,000 100,000 $550,000

Income after service department charges

$200,000

350,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 116. Blaser Corporation had $275,000 in invested assets, sales of $330,000, income from operations amounting to $33,000, and a desired minimum return of 7.5%. The return on investment for Blaser Corporation is a. 8.3% b. 10% c. 12% d. 7.5% ANSWER: RATIONALE:

c Return on Investment (ROI) = Income from Operations/Invested Assets = $33,000/$275,000 = 12% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:16 PM

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Chapter 24 - Decentralized Operations Use this information for Mason Corporation to answer the questions that follow. Mason Corporation had $650,000 in invested assets, sales of $700,000, income from operations amounting to $99,000, and a desired minimum return of 15%. 117. The profit margin for Mason is a. 7.1% b. 20% c. 15.2% d. 14.1% ANSWER:

RATIONALE:

Profit Margin = Income from Operations/Sales = $99,000/$700,000 = 14.1%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mason Corp. LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 118. The investment turnover for Mason is a. 1.08 b. 0.93 c. 6.57 d. 7.07 ANSWER:

RATIONALE:

Investment Turnover = Sales/Invested Assets = $700,000/$650,000 = 1.08

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 119. The residual income for Mason is a. $0 b. $84,150 c. ($6,000) d. $1,500 ANSWER:

RATIONALE:

Income from operations Less: Minimum acceptable income from operations as a percent of invested assets ($650,000 × 15%)

$99,000

Residual income

$ 1,500

97,500

POINTS: DIFFICULTY:

Page 70

Chapter 24 - Decentralized Operations 120. Marshall Corporation had $220,000 in invested assets, sales of $242,000, income from operations of $66,000, and a desired minimum return of 3%. The return on investment for Marshall is a. 9.1% b. 30% c. 3.0% d. 27.3% ANSWER: RATIONALE:

b Return on Investment (ROI) = Income from Operations/Invested Assets = $66,000/$220,000 = 30% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations Use this information for Chicks Corporation to answer the questions that follow. Chicks Corporation had $1,100,000 in invested assets, sales of $1,210,000, income from operations amounting to $302,500, and a desired minimum return of 15%. 121. The profit margin for Chicks is a. 25% b. 22% c. 15% d. 27.5% ANSWER: RATIONALE: POINTS: DIFFICULTY:

a Profit Margin = Income from Operations/Sales = $302,500/$1,210,000 = 25% 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chicks Corp. LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 122. The investment turnover for Chicks is a. 1.3 b. 1.5 c. 1.0 d. 1.1 ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Investment Turnover = Sales/Invested Assets = $1,210,000/$1,100,000 = 1.1 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chicks Corp. LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 123. The residual income for Chicks is a. $165,000 b. $302,500 c. $137,500 d. $191,500 ANSWER:

RATIONALE:

Income from operations Less: Minimum acceptable income from operations as a percent of invested assets ($1,100,000 × 15%)

$302,500

Residual income

$137,500

165,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chicks Corp. LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations Use this information for Clydesdale Company to answer the questions that follow. Clydesdale Company has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum return of 7%. 124. What is Clydesdale Company's profit margin? a. 20% b. 80% c. 44.4% d. 18% ANSWER: RATIONALE:

a Profit Margin = (Sales – Operating Expenses)/Sales = ($4,500,000 – $3,600,000)/$4,500,000 = 20% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Clydesdale Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 125. What is Clydesdale Company's investment turnover? a. 1.80 b. 2.25 c. 1.25 d. 1.4 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Investment Turnover = Sales/Invested Assets = $4,500,000/$2,000,000 = 2.25 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Clydesdale Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 126. What is Clydesdale Company's return on investment? a. 56% b. 20% c. 45% d. 25% ANSWER: RATIONALE:

c Return on Investment (ROI) = Income from Operations/Invested Assets = ($4,500,000 – $3,600,000)/$2,000,000 = 45% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Clydesdale Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 127. What is Clydesdale Company's residual income? a. $252,000 b. $900,000 c. $1,400,000 d. $760,000 ANSWER:

RATIONALE:

Sales Operating expenses Income from operations Less: Minimum acceptable income from operations as a percent of invested assets ($2,000,000 × 7%)

$4,500,000 3,600,000 $ 900,000

Residual income

$ 760,000

140,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Clydesdale Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 128. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets invested in the unit? a. profit center b. investment center c. production center d. cost center ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 129. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a department is called a(n) a. cost center b. profit center c. operating center d. investment center ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 130. In an investment center, the manager has the responsibility for and the authority to make decisions that affect a. the assets invested in the center, but not costs and revenues b. costs and assets invested in the center, but not revenues c. both costs and revenues for the department or division d. costs, revenues, and assets invested in the center ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 131. The profit margin is the ratio of a. income from operations to sales b. income from operations to invested assets c. assets to liabilities d. sales to invested assets ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 132. The investment turnover is the ratio of a. income from operations to sales b. income from operations to invested assets c. assets to liabilities d. sales to invested assets ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 133. The formula for the return on investment is a. Invested Assets/Income from Operations b. Sales/Invested Assets c. Income from Operations/Sales d. Income from Operations/Invested Assets ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 134. Which of the following expressions is termed the profit margin factor as used in determining the return on investment? a. Sales/Income from Operations b. Income from Operations/Sales c. Invested Assets/Sales d. Sales/Invested Assets ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 135. Which of the following formulas is the investment turnover factor as used in determining the return on investment? a. Invested Assets/Sales b. Income from Operations/Invested Assets c. Income from Operations/Sales d. Sales/Invested Assets ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 136. The profit margin for the Central Division of a company is 20%, and the investment turnover is 2.8. What is the return on investment for the Central Division? a. 20% b. 7.1% c. 14% d. 56% ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Return on Investment = Profit Margin × Investment Turnover = 0.20 × 2.8 = 56% 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 137. The Central Division of Chemical Company has a return on investment of 22% and an investment turnover of 1.4. What is the profit margin? a. 20% b. 15.7% c. 14% d. 6.36% ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Profit Margin = Return on Investment/Investment Turnover = 0.22/1.4 = 15.7% 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 138. The Central Division of Nebraska Company has a return on investment of 28% and a profit margin of 14%. What is the investment turnover? a. 0.2 b. 2.0 c. 5.0 d. 0.5 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Investment Turnover = Return on Investment/Profit Margin = 0.28/0.14 = 2.0 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 139. What additional information is needed to calculate the return on investment if income from operations is known? a. invested assets b. residual income c. direct expenses d. sales ANSWER: POINTS: DIFFICULTY:

a 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 140. The Southern Division of Knucklehead Company has a return on investment of 15% and an investment turnover of 1.2. What is the profit margin? a. 1.5% b. 12.5% c. 0.67% d. 6.67% ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Profit Margin = Return on Investment/Investment Turnover = 0.15/1.2 = 12.5% 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 141. The best measure of managerial efficiency in the use of investments in assets is a. return on stockholders' equity b. investment turnover c. income from operations d. inventory turnover ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 142. Two divisions of Oregano Company (Divisions TX and OY) have the same profit margins. Division TX's investment turnover is larger than that of Division OY (1.2 to 1.0). Income from operations for Division TX is $55,000, and income from operations for Division OY is $43,000. Division TX has a higher return on investment than Division OY by a. using income from operations as a performance measure b. comparing the profit margins c. applying a negotiated price measure d. using its assets more efficiently in generating sales ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 143. The profit margin for Division C is 6%, and the investment turnover is 1.2. What is the return on investment for Division C? a. 20% b. 6.7% c. 7.3% d. 7.2% ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Return on Investment = Profit Margin × Investment Turnover = 0.06 × 1.2 = 7.2% 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 144. The excess of divisional income from operations over a minimum acceptable amount of divisional income from operations is a. profit margin b. residual income c. return on investment d. gross profit ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 145. Assume that divisional income from operations amounts to $215,000, and top management has established 15% as the minimum return on divisional assets totaling $1,000,000. The residual income for the division is a. $65,000 b. $215,000 c. $635,000 d. $150,000 ANSWER:

RATIONALE:

Income from operations Less: Minimum acceptable income from operations as a percent of invested assets ($1,000,000 × 15%)

$215,000

Residual income

$ 65,000

150,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 146. Which of the following is not a measure that management can use in evaluating and controlling investment center performance? a. return on investment b. negotiated price c. residual income d. income from operations ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 147. The ratio of income from operations to sales, which is also a factor in the DuPont formula for determining the return on investment, is called a. profit margin b. indirect expenses c. investment turnover d. cost ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 148. The ratio of sales to invested assets, which is also a factor in the DuPont formula for determining the return on investment, is called a. profit margin b. indirect margin c. investment turnover d. cost ratio ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 149. Assume that Division Blue has achieved a yearly income from operations of $110,000 using $900,000 of invested assets. If management has set a minimum acceptable return of 11%, the residual income is a. $99,000 b. $691,000 c. $209,000 d. $11,000 ANSWER:

RATIONALE:

Income from operations Less: Minimum acceptable income from operations as a percent of invested assets ($900,000 × 11%)

$110,000

Residual income

$ 11,000

99,000

POINTS: DIFFICULTY:

Page 90

Chapter 24 - Decentralized Operations Use this information for Chacha Company to answer the questions that follow. Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. 150. What is the return on investment for Division A? a. 9.3% b. 99.3% c. 74.6% d. 4.6% ANSWER: RATIONALE:

a Return on Investment = (Sales – Cost of Goods Sold – Operating Expenses)/Invested Assets = ($140,000 – $83,000 – $43,000)/$150,000 = 9.3% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chacha Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 151. What is the profit margin for Division A? a. 11.1% b. 10.0% c. 9.0% d. 0.90% ANSWER: RATIONALE:

b Profit Margin = (Sales – Cost of Goods Sold – Operating Expenses)/Sales = ($140,000 – $83,000 – $43,000)/$140,000 = 10.0% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chacha Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 152. What is the investment turnover for Division A? a. 0.93 b. 9.3 c. 1.07 d. 10.7 ANSWER: RATIONALE:

a Investment Turnover = Sales/Invested Assets = $140,000/$150,000 = 0.93

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Chacha Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations Use this information for Saunders Company to answer the questions that follow. Division D of Saunders Company has sales of $350,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. 153. What is the return on investment for Division D? a. 153.3% b. 114.7% c. 87.2% d. 233% ANSWER: RATIONALE:

b Return on Investment = [(Sales – Cost of Goods Sold – Operating Expenses)/Invested Assets] × 100 = [($350,000 – $120,000 – $58,000)/$150,000] × 100 = 114.7% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Saunders Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 154. What is the profit margin for Division D? a. 42.9% b. 83.4% c. 49.1% d. 65.7% ANSWER: RATIONALE:

c Profit Margin = (Sales – Cost of Goods Sold – Operating Expenses)/Sales = ($350,000 – $120,000 – $58,000)/$350,000 = 49.1% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Saunders Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 155. Investment centers differ from profit centers in that they a. are responsible for net income only b. are able to invest in assets c. have less responsibilities than cost centers and profit centers d. are only responsible for revenues ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 156. Tom's Tool Factory is an investment center and is responsible for all of its net income and the use of its assets. This year, the invested assets totaled $475,000, and net income was $275,000. What is the return on investment? a. 57.9% b. 172.3% c. 5.0% d. 115.0% ANSWER: RATIONALE:

a Return on Investment (ROI) = Net Income/Invested Assets = $275,000/$475,000 = 57.9% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 157. The balanced scorecard measures four areas of financial and nonfinancial performance of a business. Identify one of the following that is not included as a performance measurement. a. internal process b. financial c. innovation and learning d. employees ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 158. Which of the following is a measure of a manager’s performance working in an investment center? a. return on investment b. residual income c. divisional income statements d. All of these choices ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Use this information for International Boot Company to answer the questions that follow. International Boot Company has income from operations of $80,000, invested assets of $500,000, and sales of $1,525,000. 159. What is the profit margin? a. 33.3% b. 5.2% c. 16.0% d. 19.1% ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Profit Margin = Income from Operations/Sales = $80,000/$1,525,000 = 5.2% 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: International Boot Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations 160. What is the investment turnover for International Boot Company? a. 16.0 b. 3.05 c. 0.33 d. 27.5 ANSWER: RATIONALE: POINTS: DIFFICULTY:

b Investment Turnover = Sales/Invested Assets = $1,525,000/$500,000 = 3.05 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: International Boot Company LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 161. The balanced scorecard measures a. only financial information b. only nonfinancial information c. both financial and nonfinancial information d. external and internal information ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 162. Which of the following is not a commonly used approach to setting transfer prices? a. market price approach b. revenue price approach c. negotiated price approach d. cost price approach ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 163. Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the a. cost price approach b. negotiated price approach c. revenue price approach d. market price approach ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations Use this information for Square Yard Products Inc. to answer the questions that follow. Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 per unit. However, the same materials are available with Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. 164. How much will Division 3's income from operations increase? a. $150,000 b. $50,000 c. $32,000 d. $72,000 ANSWER: RATIONALE:

d Increase in Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($5.00 – $3.20) × 40,000 = $72,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Square Yard Products Inc. LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 165. How much will Division 6's income from operations increase? a. $8,000 b. $15,000 c. $80,000 d. $150,000 ANSWER: RATIONALE:

a Increase in Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($3.20 – $3.00) × 40,000 = $8,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Square Yard Products Inc. LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 166. How much will Square Yard Products Inc.’s total income from operations increase? a. $32,000 b. $112,000 c. $80,000 d. $150,000 ANSWER: RATIONALE:

c Increase in Division 3's Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($5.00 – $3.20) × 40,000 = $72,000 Increase in Division 6's Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($3.20 – $3.00) × 40,000 = $8,000 Increase in Square Yard Products Inc.'s Total Income = $72,000 + $8,000 = $80,000

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Square Yard Products Inc. LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations Use this information for Jefferson Company to answer the questions that follow. Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10.00 per unit. However, the same materials are available with Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales. 167. How much will Division C's income from operations increase? a. $0 b. $75,000 c. $12,500 d. $50,000 ANSWER: RATIONALE:

c Increase in Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($10.00 – $9.50) × 25,000 = $12,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Jefferson Company LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 168. How much will Division A's income from operations increase? a. $0 b. $75,000 c. $25,000 d. $50,000 ANSWER: RATIONALE:

c Increase in Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($9.50 – $8.50) × 25,000 = $25,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Jefferson Company LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 169. How much will Jefferson's total income from operations increase? a. $37,500 b. $100,000 c. $62,500 d. $150,000 ANSWER: RATIONALE:

a Increase in Division C's Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($10.00 – $9.50) × 25,000 = $12,500 Increase in Division A's Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($9.50 – $8.50) × 25,000 = $25,000 Increase in Jefferson's Total Income = $12,500 + $25,000 = $37,500 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Jefferson Company LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 170. Which transfer price approach is used when the transfer price is set at the amount sold to outside buyers? a. market price b. cost price c. negotiated price d. variable price ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 171. The transfer price approach that uses a variety of cost concepts is the a. negotiated price approach b. standard cost approach c. cost price approach d. market price approach ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 172. Nelson Company's Radio Division currently is purchasing transistors from Charlotte Co. for $3.50 each. The total number of transistors needed is 8,000 per month. Nelson Company's Electronics Division can produce the transistors for a cost of $4.00 each, and it has plenty of capacity to manufacture the units. The $4.00 is made up of $3.25 in variable costs and $0.75 in allocated fixed costs. What should be the range of a possible transfer price? a. $3.26 to $3.49 b. $3.51 to $3.99 c. $3.26 to $3.99 d. $3.25 to $3.50 ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 173. The approach that requires the transfer price to be less than the market price but greater than the supplying division’s variable costs per unit is called the a. cost price approach b. negotiated cost approach c. standard cost approach d. market price approach ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 174. Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, what range of prices should be used during negotiations between the two divisions? a. $22 to $30 b. $22 to $25 c. over $30 d. $25 to $30 ANSWER: POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations Matching Match each of the following phrases as describing (a) an advantage, (b) a disadvantage, or (c) neither of decentralization. a. Advantage of decentralization b. Disadvantage of decentralization c. Neither an advantage nor a disadvantage DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-01 - 24-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 175. Responsibilities delegated to unit managers ANSWER: a POINTS: 1 176. Internal price wars ANSWER: b POINTS: 1 177. Operational issues are made by managers closest to the operations ANSWER: a POINTS: 1 178. Separate office staff ANSWER: b POINTS: 1 179. Separate sales forces ANSWER: b POINTS: 1 An activity base is used to charge service department expenses. Match each of the following activity bases with the appropriate department (a–h). a. Purchasing b. Payroll Accounting c. Human Resources d. Maintenance e. Information Systems Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations f. Marketing g. President’s Office h. Transportation DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:21 PM 180. Number of work orders ANSWER: d POINTS: 1 181. Number of employees ANSWER: c POINTS: 1 182. Number of payroll checks ANSWER: b POINTS: 1 183. Number of purchase requisitions ANSWER: a POINTS: 1 184. Allocated equally among divisions ANSWER: g POINTS: 1 185. Number of advertising campaigns ANSWER: f POINTS: 1 186. Number of miles ANSWER: h POINTS: 1 187. Number of computers in department ANSWER: e POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations Match each definition that follows with the term (a–e) it defines. a. Controllable revenues b. Profit margin c. Investment turnover d. Return on investment e. Residual income DIFFICULTY:

Moderate Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:22 PM 188. Income from operations minus minimum acceptable income from operations ANSWER: e POINTS: 1 189. Income from operations divided by invested assets ANSWER: d POINTS: 1 190. Ratio of income from operations to sales ANSWER: b POINTS: 1 191. Earned by profit centers ANSWER: a POINTS: 1 192. Ratio of sales to invested assets ANSWER: c POINTS: 1 Subjective Short Answer 193. The budget for Department 6 of Cardinal Company for the current month ending March 31 is as follows: Materials Factory wages Supervisory salaries Depreciation of plant and equipment Copyright Cengage Learning. Powered by Cognero.

$208,000 265,000 67,800 35,000 Page 109

Chapter 24 - Decentralized Operations 22,500 15,500 9,700

Power and light Insurance and property taxes Maintenance

During March, the costs incurred in Department 6 of Cardinal Company were materials, $204,000; factory wages, $285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; maintenance, $9,456. (a) (b)

Prepare a budget performance report for the supervisor of Department 6 of Cardinal Company for the month of March. Are there any significant variances (5% or greater) of the budgeted amounts that should be examined by the supervisor?

ANSWER: (a) BUDGET PERFORMANCE REPORT Supervisor, Department 6—Cardinal Company For Month Ended March 31 Materials Factory wages Supervisory salaries Depreciation of plant and equipment Power and light Insurance and property taxes Maintenance

Budget Actual Over Under $208,000 $204,000 $4,000 265,000 285,000 $20,000 67,800 63,600 4,200 35,000 22,500 15,500 9,700

35,000 21,360 14,400 9,456

1,140 1,100 244

$623,500 $632,816 $20,000 $10,684 (b) The factory wages, supervisory salaries, power and light, and insurance and property taxes should be examined by the supervisor. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-02 - 24-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations 194. Using the data below for Ace Guitar Company, determine the divisional income from operations for the Regions A and B. Region A $500,000 200,000 150,000

Sales Cost of goods sold Selling expenses

Region B $900,000 300,000 275,000

Service department expenses: Purchasing Payroll accounting

$90,000 30,000

Allocate service department expenses proportionally to the sales of each region. Round the percentage of sales allocation to one decimal place. ANSWER:

Percent of sales allocation: Region A = $500,000/$1,400,000 = 35.7% Region B = $900,000/$1,400,000 = 64.3% Region A = 35.7% × $120,000 = $42,840 allocation of service costs Region A Income = $500,000 – $200,000 – $150,000 – $42,840 = $107,160 Region B = 64.3% × $120,000 = $77,160 allocation of service costs Region B Income = $900,000 – $300,000 – $275,000 – $77,160 = $247,840

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 195. Piano Company’s costs were over budget by $47,000. Piano Company is divided into two regions. The first region’s costs were over budget by $5,000. Determine the amount that the second region’s costs were over or under budget. ANSWER: POINTS: DIFFICULTY:

$47,000 – $5,000 = $42,000 over budget 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:25 PM 196. Xang Company’s costs were over budget by $46,000. Xang Company is divided into two regions. The first region’s costs were over budget by $7,000. Determine the amount that the second region’s costs were over or under budget. ANSWER: POINTS: DIFFICULTY:

$46,000 – $7,000 = $39,000 over budget 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 197. Using the data from Terrace Industries, determine the divisional income from operations for Districts 1 and 2.

Sales Cost of goods sold Selling expenses

District 1 $300,000 120,000 55,000

Service department expenses: Purchasing Payroll accounting

District 2 $600,000 150,000 75,000

$70,000 80,000

Allocate service department expenses proportionally to the sales of each district. ANSWER:

Percent of sales allocation: District 1 = $300,000/$900,000 = 33.3% District 2 = $600,000/$900,000 = 66.7%

District 1 = 33.3% × $150,000 = $50,000 allocation of service costs District 1 Income = $300,000 – $120,000 – $55,000 – $50,000 = $75,000 District 2 = 66.7% × $150,000 = $100,000 allocation of service costs District 2 Income = $600,000 – $150,000 – $75,000 – $100,000 = $275,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 198. A department store apportions payroll costs on the basis of the number of payroll checks issued. Accounting costs are apportioned on the basis of the number of reports. The payroll costs for the year were $231,000, and the accounting costs for the year totaled $75,500. The departments and the number of payroll checks and accounting reports for each are as follows: Number of Payroll Checks 483 1,470 147

Department R Department S Department T

Number of Reports 70 85 345

Determine the amount of (a) payroll cost and (b) accounting cost to be apportioned to each department. ANSWER:

(a)

Number of payroll checks Percent Payroll cost

Department Total R S T 2,100 483 1,470 147 100% 23% 70% 7% $231,000 $53,130 $161,700 $16,170

(b) Number of reports Percent Accounting cost

500 70 85 345 100% 14% 17% 69% $75,500 $10,570 $12,835 $52,095

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 199. Some items are omitted from each of the following condensed divisional income statements of Demi Inc.

Sales Cost of goods sold Gross profit Operating expenses Income from operations (a) (b)

Eastern Division $ (a) 480,000 $230,000 95,000 $ (b)

Western Division $420,000 120,000 $ (c) 160,000 $ (d)

Central Division $580,000 (e) $200,000 (f) $ 75,000

Determine the amount of the missing items, identifying them by letter (a–f). Based on income from operations, which division is the most profitable?

ANSWER:

(a) (a) (b) (c) (d) (e) (f)

$710,000 ($480,000 + $230,000) $135,000 ($230,000 – $95,000) $300,000 ($420,000 – $120,000) $140,000 ($300,000 – $160,000) $380,000 ($580,000 – $200,000) $125,000 ($200,000 – $75,000)

(b) The Western Division is the most profitable. POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 200. Use the data below for Coffee & Cocoa Company (a) Determine the divisional income from operations for the three regions by allocating the service department expenses proportionally to the sales of the regions. (b) Determine the increase or decrease in net income if Region C did not operate.

Sales Cost of goods sold Selling expenses

Region A $600,000 200,000 150,000

Region B $900,000 350,000 275,000

Service department expenses: Purchasing Payroll accounting ANSWER:

Region C $300,000 190,000 100,000

$120,000 80,000 (a)

Sales Cost of goods sold Selling expenses Serv. dept. expenses Net income

Region A Region B Region Total $600,000 $900,000 $300,000 $1,800,000 200,000 350,000 190,000 740,000 150,000 275,000 100,000 525,000 66,667 100,000 33,333 200,000 $183,333 $175,000 $(23,333) $ 335,000

(b) $10,000 decrease POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:26 PM

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Chapter 24 - Decentralized Operations 201. The following financial information was summarized from the accounting records of Buddy Corporation for the current year ended December 31: Beagle Dalmatian Corporate Division Division Total Cost of goods sold $47,200 $30,270 Direct operating expenses 27,000 20,400 Net sales 99,000 87,000 Interest expense $ 2,040 General overhead 18,160 Income tax 4,700 Calculate: (a) The gross profit for the Dalmatian Division. (b) The income from operations from the Dalmatian Division. (c) The gross profit for the Beagle Division. (d) The income from operations from the Beagle Division. (e) The net income for Buddy Corporation. (a) Gross profit for the Dalmatian Division: $87,000 – $30,270 = $56,730 (b) Income from operations from the Dalmatian Division: $87,000 – $30,270 – $20,400 = $36,330 (c) Gross profit for the Beagle Division: $99,000 – $47,200 = $51,800 (d) Income from operations from the Beagle Division: $99,000 – $47,200 – $27,000 = $24,800

ANSWER:

(e) Net income for Buddy Corporation: $36,330 + $24,800 – $2,040 – $18,160 – $4,700 = $36,230

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-03 - 24-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 11:46 AM DATE MODIFIED: 3/15/2017 1:29 PM

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Chapter 24 - Decentralized Operations 202. Miller's Quarter Horse Company has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum return of 7%. If needed, round to one decimal place. (a) What is Miller's profit margin? (b) What is the investment turnover? (c) What is the return on investment? (d) What is Miller's residual income? ANSWER:

(a) $4,500,000 – $3,800,000 = $700,000 $700,000/$4,500,000 = 15.6% (b) $4,500,000/$2,500,000 = 1.8 (c) $700,000/$2,500,000 = 28%

(d) 7% × $2,500,000 = $175,000 $700,000 – $175,000 = $525,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 11:47 AM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 203. Division G of Elephant Preservation Inc. has sales of $895,000, cost of goods sold of $475,000, operating expenses of $79,500, and invested assets of $750,000. Calculate: (a) The return on investment for Division G. (b) The profit margin for Division G. (c) The investment turnover for Division G. ANSWER:

1. Return on investment: ($895,000 – $475,000 – $79,500)/$750,000 = $340,500/$750,000 = 45.4% 2. Profit margin: $340,500/$895,000 = 38.0%

3. Investment turnover: $895,000/$750,000 = 1.19 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 3/14/2017 11:47 AM DATE MODIFIED: 3/14/2017 2:07 PM 204. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for the year ended December 31 are as follows: Division A Division B $190,000 $125,500 112,500 92,750 29,500 12,625 225,000 99,000

Revenues Operating expenses Service department charges Invested assets

(a) Prepare condensed income statements for the past year for each division. (b) Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. Round the profit margin percentage to two decimal places and investment turnover to four decimal places. ANSWER:

(a) Bentz Co. Divisional Income Statements For the Year Ended December 31 Division Division

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Chapter 24 - Decentralized Operations A B $190,000$125,500 112,500 92,750

Revenues Operating expenses Income from operations before service department charges Service department charges

$77,500 $32,750 29,500 12,625 $48,000 $20,125

Income from operations (b) Return on investment: (ROI) = Profit Margin × Investment Turnover ROI = Income from Operations × Sales

Sales Invested Assets

Division A = $48,000 × $190,000 $190,000 $225,000 ROI = 25.26% × 0.8444 ROI = 21.3% Division B = $20,125 × $125,500 $125,500 $99,000 ROI = 16.04% × 1.2677 ROI = 20.3% POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 205. Magnolia Company's Division A has income from operations of $80,000 and assets of $400,000. The minimum acceptable return on assets is 12%. What is the residual income for the division? Income from operations Minimum acceptable income from operations as a percent of assets: $400,000 × 12% Residual income POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM ANSWER:

$80,000 48,000 $32,000

206. Ralston Company has income from operations of $75,000, invested assets of $360,000, and sales of $790,000. Use the DuPont formula to calculate the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) return on investment. Round the profit margin percentage to two decimal places and the investment turnover to three decimal places. ANSWER:

(a) Profit Margin = $75,000/$790,000 = 9.49% (b) Investment Turnover = $790,000/$360,000 = 2.194 (c) Return on Investment = 9.49% × 2.194 = 20.82% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 207. The Creative Division of Barry Company reported the following results for December: Invested assets Profit margin Return on investment

$1,200,000 25% 30%

Based on this information, what were sales? ANSWER:

$1,200,000 × 30% = $360,000 $360,000/25% = $1,440,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 208. Data for Divisions A, B, C, D, and E are as follows: Div. A B C D E (a) (b) (c)

Income from Operations (a) $35,000 $455,000 (d) $525,000 $73,500 $800,000 (j) (m) (n) Sales

Inv. Assets $200,000 $284,375 (g) (k) $250,000

Return on Invest. (b) 16% (h) (l) (o)

Profit Margin (c) (e) (i) 13.0% 16.0%

Invest. Turnover 1.6 (f) 1.2 2.5 2.0

Determine the missing items, identifying each by letter (a–o). Round percentage and turnover values to one decimal place. Which division is most profitable in terms of income from operations? Which division is most profitable in terms of return on investment?

ANSWER:

(a) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)

$320,000 ($200,000 × 1.6) 17.5% ($35,000/$200,000) 10.9% ($35,000/$320,000) $45,500 ($284,375 × 16%) 10% ($45,500/$455,000) 1.6 ($455,000/$284,375) $437,500 ($525,000/1.2) 16.8% ($73,500/$437,500) 14% ($73,500/$525,000) $104,000 ($800,000 × 13.0%) $320,000 ($800,000/2.5) 32.5% ($104,000/$320,000) $500,000 ($250,000 × 2.0) $80,000 ($500,000 × 16%) 32% (16% × 2.0)

(b) Division D (c) Division D POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24 - Decentralized Operations 209. Several items are missing from the following table of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter (a–l). Round percentage values to one decimal place.

Division East West North South

Invested Assets

Income from Oper.

Return on Invest.

Min. Return

(a) $850,000 $825,000 (j)

(b) $153,000 (g) $129,000

16% 12% (h) (k)

Min. Amt. of Income from Oper. $128,000 (e) (i) $60,000

Residual Income $10,000 (f) $24,000 (l)

ANSWER:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

$800,000 ($128,000/16%) $138,000 ($128,000 + $10,000) 17.3% ($138,000/$800,000) 18.0% ($153,000/$850,000) $102,000 ($850,000 × 12%) $51,000 ($153,000 – $102,000) $165,000 ($825,000 × 20%) 17.1% ($141,000/$825,000) $141,000 ($165,000 – $24,000) $537,500 ($129,000/24%) 11.2% ($60,000/$537,500) $69,000 ($129,000 – $60,000)

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 210. The sales, income from operations, and invested assets for each division of Grosbeak Company are as follows:

Division E Division F Division G Copyright Cengage Learning. Powered by Cognero.

Sales $5,000,000 4,800,000 7,000,000

Income from Operations $550,000 860,000 860,000

Invested Assets $2,400,000 2,500,000 2,900,000 Page 124

Chapter 24 - Decentralized Operations (a) Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. Round profit margin percentage to two decimal places, investment turnover to four decimal places, and return on investment to one decimal place. (b) Which division is the most profitable per dollar invested?

ANSWER:

(a) Return on investment: ROI = Profit Margin × Investment Turnover ROI = Income from Operations × Sales Sales Invested Assets Division E: ROI = $550,000 × $5,000,000 $5,000,000 $2,400,000 ROI = 11.00% × 2.0833 ROI = 22.9% Division F: ROI = $860,000 × $4,800,000 $4,800,000 $2,500,000 ROI = 17.92% × 1.9200 ROI = 34.4% Division G: ROI = $860,000 × $7,000,000 $7,000,000 $2,900,000 ROI = 12.29% × 2.4138 ROI = 29.7% (b) Division F is the most profitable.

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 211. The sales, income from operations, and invested assets for each division of Wren Company are as follows:

Division C Division D

Income from Sales Operations $5,000,000 $630,000 6,800,000 760,000

Division E

3,750,000

750,000

Invested Assets $4,000,000 3,900,000 7,500,000

Management has established a minimum return for invested assets of 8%. (a)

Determine the residual income for each division.

(b)

Based on residual income, which of the divisions is the most profitable?

ANSWER:

(a) Division C: Division D: Division E:

$630,000 – ($4,000,000 × 8%) = $310,000 $760,000 – ($3,900,000 × 8%) = $448,000 $750,000 – ($7,500,000 × 8%) = $150,000

(b) Division D POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 212. Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, income from operations of $200,000, and residual income of $151,000. Determine the minimum acceptable return on divisional assets. ANSWER:

$200,000 – ($350,000 × X%) = $151,000

X = 14% POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM 213. Bottlebrush Company has income from operations of $60,000, invested assets of $345,000, and sales of $786,000. Use the DuPont formula to calculate the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round the profit margin percentage to two decimal places, the investment turnover to three decimal places, and the return on investment to two decimal places. ANSWER:

(a) Profit Margin = $60,000/$786,000 = 7.63% (b) Investment Turnover = $786,000/$345,000 = 2.278 (c) Return on Investment = 7.63% × 2.278 = 17.38% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-04 - 24-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 214. The sales, income from operations, invested assets, and residual income for each division of Marcus Company are as follows:

Division X Division Y Division Z

Income from Invested Residual Sales Operations Assets Income $5,000,000 $645,000 $4,100,000 $235,000 6,800,000 777,000 4,000,000 377,000 3,750,000 760,000 7,600,000 0

Determine the minimum return for invested assets.

ANSWER:

Division X: Division Y: Division Z:

$645,000 – ($4,100,000 × X%) = $235,000 $777,000 – ($4,000,000 × X%) = $377,000 $760,000 – ($7,600,000 × X%) = $0

X = 10% POINTS: DIFFICULTY:

215. Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materia Division A at a variable cost of $20 per unit. (a)

If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase?

(b)

Assuming a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase?

(c)

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Chapter 24 - Decentralized Operations (d)

If the negotiated price approach is used, what would be the range of acceptable transfer prices?

(a)$600,000 Increase in Division A's Income from Operations: (Market Price – Transfer Price) × Units Transferred = ($30 – $25) × 60,000 = $3 Increase in Division B's Income from Operations: (Transfer Price – Variable Cost per Unit) × Units Transferred = ($25 – $20) × 60,000 = Increase in Best Bread Company's Income from Operations = $300,000 + $300,000 = $6 ANSWER: (b)Division A would save $5 per unit on 60,000 units or $300,000. Increase in Division A's Income from Operations: (Market Price – Transfer Price) × Units Transferred = ($30 – $25) × 60,000 = $300,000

(c)Division B would earn an additional $300,000 by selling 60,000 units at $5 above the varia Increase in Division B's Income from Operations: (Transfer Price – Variable Cost per Unit) × Units Transferred = ($25 – $20) × 60,000 = $ (d)$20 to $30

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/15/2017 1:31 PM

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Chapter 24 - Decentralized Operations 216. The materials used by Hibiscus Company's Division A are currently purchased from an outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. (a) By how much will each division’s income increase as a result of this transfer? (b) What is the total increase in income for Hibiscus Company? ANSWER:

(a) Division A Change in sales Decrease in variable costs [20,000 × ($55 – $48)] Increase in income

0 140,000 $140,000

Division B Increase in sales (20,000 × $48) Increase in variable cost (20,000 × $42) Increase in income

$960,000 840,000 $120,000

(b) Total increase in income for Hibiscus Company

$260,000

POINTS: DIFFICULTY:

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Chapter 24 - Decentralized Operations 217. The materials used by Holly Company's Division A are currently purchased from an outside supplier. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The normal price for which Division B normally sells its units is $53 per unit. What is the range of transfer prices within which the two division managers should negotiate? ANSWER: POINTS: DIFFICULTY:

$42 to $53 per unit 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.24-05 - 24-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.36 - Budgeting and Responsibility ACCT.IMA.09 - Performance Measurement BUSPROG: Analytic DATE CREATED: 1/16/2017 4:22 PM DATE MODIFIED: 3/14/2017 2:07 PM

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Chapter 24 - Decentralized Operations 218. Materials used by Layton Company's Division 1 are currently purchased from an outside supplier at $58 per unit. Division 2 is able to supply Division 1 with 22,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units. (a) By how much will each division’s income increase as a result of this transfer? (b) What is the total increase in income for Layton? ANSWER:

(a) Division 1 Change in sales Decrease in variable costs [20,000 × ($58 – $50)] Increase in income

0 160,000 $160,000

Division 2 Increase in sales (20,000 × $50) Increase in variable cost (20,000 × $46)

$1,000,000 920,000

Increase in income

(b) Total increase in income for Layton Company

$ 240,000

80,000

POINTS: DIFFICULTY:

Page 132

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing True / False 1. Differential revenue is the amount of income that would result from the best available alternative proposed use of cash. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 2. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 3. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48. a. True b. False ANSWER: RATIONALE:

False Differential cost is the increase or decrease in the cost that is expected from a course of action as compared to an alternative. Differential Cost = Total Unit Cost of Manufacturing Product Y after Modifying Style – Total Current Cost of Manufacturing Product Y = $48 – $36 = $12

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 4. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $12. a. True b. False ANSWER: RATIONALE:

True Differential cost is the increase or decrease in the cost that is expected from a course of action as compared to an alternative. Differential Cost = Total Unit Cost of Manufacturing Product Y after Modifying Style – Total Current Cost of Manufacturing Product Y = $48 – $36 = $12

POINTS: DIFFICULTY:

Page 2

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Hill Co. to answer the questions that follow. Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce. 5. The differential revenue of producing Product P over Product O is $82 per pound. a. True b. False ANSWER: RATIONALE:

False Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action compared to an alternative. Differential Revenue = Revenue per Pound of Product P – Revenue per Pound of Product O = $82 – $60 = $22 per pound

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Hill Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 3

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 6. The differential revenue of producing Product P over Product O is $22 per pound. a. True b. False ANSWER: RATIONALE:

True Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action compared to an alternative. Differential Revenue = Revenue per Pound of Product P – Revenue per Pound of Product O = $82 – $60 = $22 per pound

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Hill Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 7. The differential cost of producing Product P over Product O is $13 per pound. a. True b. False ANSWER: RATIONALE:

True Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared to an alternative. Differential Cost = Cost per Pound of Product P – Cost per Pound of Product O = ($42 + $13) – $42 = $55 – $42 = $13 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Hill Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM Copyright Cengage Learning. Powered by Cognero.

Page 4

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 8. The differential cost of producing Product P over Product O is $55 per pound. a. True b. False ANSWER: RATIONALE:

False Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared to an alternative. Differential Cost = Cost per Pound of Product P – Cost per Pound of Product O = ($42 + $13) – $42 = $55 – $42 = $13 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Hill Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 9. Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 5

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 10. Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 11. A cost that will not be affected by later decisions is termed a sunk cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 12. A cost that will not be affected by later decisions is termed an opportunity cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 13. The amount of income that would result from an alternative use of cash is called opportunity cost. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 14. Since the costs of producing an intermediate product do not change regardless of whether the intermediate product is sold or processed further, these costs are not considered in deciding whether to further process a product. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 15. The costs of initially producing an intermediate product should be considered in deciding whether to further process a product, even though the costs will not change, regardless of the decision. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 16. In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all variable costs and expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 17. Differential analysis only considers the short-term (one-year) effects of discontinuing a product. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 18. Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 19. In addition to the differential costs in an equipment replacement decision, the remaining useful life of the old equipment and the estimated life of the new equipment are important considerations. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 20. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs of serving different customers. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 21. When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 22. Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 23. Make-or-buy decisions should be made only with related parties. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 24. Depending on the capacity of the plant, a company may best be served by further processing some of the product and leaving the rest as is, with no further processing. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 25. A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 26. The product cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 27. The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 28. In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 29. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 30. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 31. Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 32. A bottleneck begins when demand for the company’s product exceeds the ability to produce the product. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 33. A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 34. When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 35. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 36. The lowest contribution margin per scarce resource is the most profitable. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 37. Activity-based costing provides more accurate and useful cost data than traditional systems. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 38. Activity-based costing is determined by charging products for only the services (activities) they used during production. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 39. In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 40. In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 41. In using the total cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 42. Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 43. The total cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 44. Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 45. The desired selling price for a product will be the same under both variable and total costs. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Multiple Choice 46. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is a. manufacturing margin b. contribution margin c. differential cost d. differential revenue ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 47. The amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative is a. period cost b. product cost c. differential cost d. discretionary cost ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 48. A cost that will not be affected by later decisions is termed a a. period cost b. differential cost c. sunk cost d. replacement cost ANSWER: POINTS: DIFFICULTY:

Sales Costs: Variable costs Fixed costs Total costs Income (loss)

F $300,000

Product G $210,000

H $340,000

Total $850,000

$180,000 50,000 $230,000 $ 70,000

$180,000 50,000 $230,000 $(20,000)

$220,000 40,000 $260,000 $ 80,000

$590,000 140,000 $730,000 $120,000

Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product F and Product H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G? a. $20,000 increase b. $30,000 increase c. $20,000 decrease d. $30,000 decrease ANSWER:

RATIONALE:

Differential Analysis Continue Product G (Alternative 1) or Discontinue Product G (Alternative 2)

Continue Product G Copyright Cengage Learning. Powered by Cognero.

Discontinue Product G

Differential Effect on Income Page 25

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable costs Fixed costs Income (loss)

$850,000

$640,000*

–$210,000

– 590,000 – 140,000 $120,000

–410,000**

180,000

– 140,000 $ 90,000

0 –$ 30,000

*$850,000 – $210,000 = $640,000 **$590,000 – $180,000 = $410,000 As indicated by the differential analysis, the income will decrease by $30,000 if Product G is discontinued.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 50. The condensed income statement of Hayden Corp. for the past year is as follows: Product Sales Costs: Variable costs Fixed costs Total costs Income (loss)

T $680,000

U $320,000

$540,000 145,000 $685,000 $ (5,000)

$220,000 40,000 $260,000 $ 60,000

Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in net income for the current year that will result from the discontinuance of Product T? a. $140,000 increase b. $5,000 increase Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing c. $5,000 decrease d. $140,000 decrease ANSWER:

d Differential Analysis Continue Product T (Alternative 1) or Discontinue Product T (Alternative 2)

RATIONALE:

Differential Continue Discontinue Effect Product T Product T on Income (Alternative 1) (Alternative 2) (Alternative 2)

Revenues

$1,000,0001

$320,000

–$680,000

Variable costs

–760,0002

–220,000

540,000

Fixed costs

–185,0003

–185,000

Income (loss )

$ 55,000

–$ 85,000

–$140,000

Costs:

1$680,000 + $320,000 = $1,000,000 2$540,000 + $220,000 = $760,000 3$145,000 + $40,000 = $185,000

As indicated by the differential analysis, the income will decrease by $140,000 if Product T is discontinued.

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 51. Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20 including fixed costs and $11 excluding fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? a. $150,000 cost increase b. $120,000 cost decrease c. $150,000 cost increase d. $120,000 cost increase ANSWER: RATIONALE:

b Differential Analysis Purchase the Part (Alternative 1) or Make the Part (Alternative 2) Differential Purchase the Make the Part Effect Part (Alternative on Income (Alternative 1) 2) (Alternative 2) Costs: Purchase price ($15 × 30,000) Variable costs ($11 × 30,000)

–$450,000 0

$ 0 –330,000

$450,000 –330,000

Fixed costs ($20 – $11) × 30,000 Income (loss)

–270,000

–$720,000

–$600,000

$120,000

As indicated by the differential analysis, the differential cost would decrease by $120,000 from making the part that is currently being purchased.

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 52. Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36 including fixed costs and $26 excluding fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? a. $30,000 cost decrease b. $180,000 cost increase c. $30,000 cost increase d. $180,000 cost decrease ANSWER: RATIONALE:

c Differential Analysis Purchase the Part (Alternative 1) or Make the Part (Alternative 2) Differential Purchase the Make the Part Effect Part (Alternative 2) on Income (Alternative 1) (Alternative 2) Costs: Purchase price ($24 × 15,000)

–$360,000

Variable costs ($26 × 15,000)

$360,000

–390,000

Fixed costs [($36 – $26) × 15,000]

–150,000

Income (loss)

–$510,000

–$540,000

–$30,000

As indicated by the differential analysis, the differential would increase by $30,000 from making the part that is currently being purchased. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 53. The amount of income that would result from an alternative use of cash is called a. differential income b. sunk cost c. differential revenue d. opportunity cost ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 54. Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per pound to produce. What is the differential cost of producing Product C? a. $30 per pound b. $31 per pound c. $28 per pound d. $55 per pound ANSWER: RATIONALE:

b Differential Cost of Producing Product C = Cost per Pound of Product C – Cost per Pound of Product B = ($28 + $31) – $28 = $59 – $28 = $31 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Carmen Co. to answer the questions that follow. Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20 per pound and costs $15.75 per pound to produce. Product D would sell for $38 per pound and would require an additional cost of $8.55 per pound to produce. 55. What is the differential cost of producing Product D? a. $6.50 per pound b. $8.55 per pound c. $17.00 per pound d. $5.25 per pound ANSWER: RATIONALE:

b Differential Cost of Producing Product D = Costs per Pound of Product D – Costs per Pound of Product J = ($15.75 + $8.55) – $15.75 = $24.30 – $15.75 = $8.55 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carmen Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 56. What is the differential revenue of producing Product D? a. $6.75 per pound b. $22.25 per pound c. $18.00 per pound d. $6.25 per pound ANSWER: RATIONALE:

c Differential Revenue of Producing Product D = Revenue per Pound of Product D – Revenue per Pound of Product J = $38.00 – $20.00 = $18.00 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Carmen Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 57. Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C? a. $35 per pound b. $38 per pound c. $95 per pound d. $60 per pound ANSWER: RATIONALE:

a Differential Revenue of Producing Product C = Revenue per Pound of Product C – Revenue per Pound of Product B = $95 – $60 = $35 per pound POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 58. Delaney Company is considering replacing equipment that originally cost $600,000 and that has $420,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation? a. $370,000 b. $790,000 c. $180,000 d. $190,000 ANSWER: RATIONALE:

c Sunk Cost = Book Value of Equipment = Original Cost – Accumulated Depreciation = $600,000 – $420,000 = $180,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 59. Delaney Company is considering replacing equipment that originally cost $600,000 and that has $420,000 accumulated depreciation to date. A new machine will cost $790,000, and the old equipment can be sold for $8,000. What is the sunk cost in this situation? a. $172,000 b. $180,000 c. $188,000 d. $290,000 ANSWER: RATIONALE:

b Sunk Cost = Book Value of Equipment = Original Cost – Accumulated Depreciation = $600,000 – $420,000 = $180,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 60. Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments that yield a 12% return are available, the opportunity cost of the purchase of the land is a. $35,000 b. $30,000 c. $250,000 d. $4,200 ANSWER: RATIONALE:

b The revenue forgone from an alternative investment of cash is the opportunity cost of the purchase of the land. Opportunity Cost of Purchase of Land = Total Cash Outlay × Return on Alternative Investment = $250,000 × 12% = $30,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 61. Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease out for $36,000 per year. If alternative investments that yield a 9% return are available, the opportunity cost of the purchase of the land is a. $27,000 b. $36,000 c. $9,000 d. $72,000 ANSWER: RATIONALE:

a The revenue forgone from an alternative investment of cash is the opportunity cost of the purchase of the land. Opportunity Cost of Purchase of Land = Total Cash Outlay × Return on Alternative Investment = $300,000 × 9% = $27,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 62. Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease out for $40,000 per year. If alternative investments that yield a 15% return are available, the opportunity cost of the purchase of the land is a. $75,000 b. $40,000 c. $44,000 d. $7,500 ANSWER: RATIONALE:

a The revenue forgone from an alternative investment of cash is the opportunity cost of the purchase of the land. Opportunity Cost of Purchase of Land = Total Cash Outlay × Return on Alternative Investment = $500,000 × 15% = $75,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 63. Jacoby Company received an offer from an exporter for 30,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$21 12 5

What is the differential revenue from the acceptance of the offer? a. $450,000 b. $630,000 c. $510,000 d. $120,000 ANSWER: RATIONALE:

a Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2)

Revenues

Reject Order Accept Order Difference in (Alternative 1) (Alternative 2) Revenues $0 $450,000 $450,000*

*30,000 units × $15 = $450,000 As indicated by the differential analysis, the differential revenue from the acceptance of the offer is $450,000. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Stryker Industries to answer the questions that follow. Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$20 11 1

64. What is the differential revenue from the acceptance of the offer? a. $300,000 b. $262,500 c. $52,500 d. $250,000 ANSWER: RATIONALE:

b Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2)

Revenues

Reject Order Accept Order Difference in (Alternative 1) (Alternative 2) Revenues $0 $262,500* $262,500

*15,000 units × $17.50 = $262,500 As indicated by the differential analysis, the differential revenue from the acceptance of the offer is $262,500. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stryker LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 65. What is the differential cost from the acceptance of the offer? a. $200,000 b. $262,500 c. $85,500 d. $165,000 ANSWER: RATIONALE:

d Differential Cost from Acceptance of Offer = Costs Incurred if Offer Is Accepted = 15,000 units × $11 = $165,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stryker LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 66. What is the amount of income or loss from the acceptance of the offer? a. $97,500 income b. $94,500 loss c. $37,500 income d. $37,500 loss ANSWER: RATIONALE:

a Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) Reject Order Accept Order (Alternative 1) (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$262,500*

$262,500

Costs

–165,000

Income (loss)

–165,000** $97,500

$97,500

*15,000 units × $17.50 = $262,500 **15,000 units × $11 = $165,000 As indicated by the differential analysis, the differential income from the acceptance of the offer is $97,500. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Stryker LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Rylan Corporation to answer the questions that follow. Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed

$22 11 6

67. What is the differential cost from the acceptance of the offer? a. $150,000 b. $275,000 c. $550,000 d. $125,000 ANSWER: RATIONALE:

b Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) Reject Order Accept Order Difference in (Alternative 1) (Alternative 2) Costs Costs

$275,000*

$275,000

*25,000 units × $11 = $275,000 As indicated by the differential analysis, the differential cost from the acceptance of the offer is $275,000. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Rylan Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 68. What is the amount of the income or loss from the acceptance of the offer? a. $125,000 loss b. $25,000 income c. $125,000 income d. $25,000 loss ANSWER: RATIONALE:

c Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) Reject Order Accept Order (Alternative 1) (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$400,000*

$400,000

Costs

–275,000

Income (loss)

–275,000** $125,000

$125,000

*25,000 units × $16 = $400,000 **25,000 units × $11 = $275,000 As indicated by the differential analysis, the differential income from the acceptance of the offer is $125,000. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 69. Relevant revenues and costs refer to a. activities that occurred in the past b. monies already earned and/or spent c. last year's net income d. differences between the alternatives being considered ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 70. Keating Co. is considering disposing of equipment with a cost of $50,000 and accumulated depreciation of $40,000. Keating Co. can sell the equipment through a broker for $25,000, less a 5% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is a. $17,000 b. $7,000 c. $27,000 d. $14,500 ANSWER: RATIONALE:

a Differential Analysis Sell Equipment (Alternative 1) or Lease Equipment (Alternative 2)

Sell Equipment (Alternative 1)

Differential Lease Effect Equipment on Income (Alternative 2) (Alternative 2)

Revenues

$25,000

$48,750

$23,750

Costs

–1,250* $23,750

–8,000

–6,750

Income (loss) $40,750 $17,000 *$25,000 × 5% = $1,250 As indicated by the differential analysis, the differential income from the lease alternative is $17,000. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 71. Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? a. $12,000 decrease b. $4,000 increase c. $20,000 decrease d. $1,600 increase ANSWER:

d Differential Analysis Purchase the Part (Alternative 1) or Make the Part (Alternative 2)

RATIONALE:

Differential Purchase the Make the Part Effect Part (Alternative 2) on Income (Alternative 1) (Alternative 2) Costs: Purchase price ($8.00 × 4,000) Variable costs [($9.00 – $0.60*) × 4,000] Income (loss)

–$32,000

$32,000

–33,600

–$32,000

–$33,600

–$ 1,600

As indicated by the differential analysis, the cost would increase by $1,600 from making the part that is currently being purchased. *The fixed costs are not affected by the decision and are thus omitted from the analysis. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 72. Heston and Burton, CPAs, currently work a five-day week. They estimate that net income for the firm would increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a five-day workweek is an example of a(n) a. differential revenue b. sunk cost c. differential income d. opportunity cost ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 73. Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is a(n) a. decrease of $11,000 b. decrease of $15,000 c. increase of $11,000 d. increase of $15,000 ANSWER:

RATIONALE:

a Differential Analysis Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2) Differential Continue with Replace Old Effect Old Machine Machine on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine

1,500

$ 1,500

Costs: Purchase price 0 –25,000 –25,000 * ** Variable manufacturing costs (5 12,500 –130,000 –117,500 years) Income (loss) –$130,000 –$ 141,000 –$11,000 *$26,000 × 5 years **$23,500 × 5 years As indicated by the differential analysis, the total net differential decrease in income for the new machine for the entire five years is $11,000. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 74. Nighthawk Inc. is considering disposing of an old machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The differential effect on income for the entire three years for the new machine is a(n) a. $8,750 increase b. $31,250 decrease c. $8,750 decrease d. $2,925 decrease ANSWER:

RATIONALE:

a Differential Analysis Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2) Continue with Old Machine (Alternative 1)

Replace Old Machine (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues: Proceeds from sale of old $0 $ 6,250 $ 6,250 machine Costs: Purchase price 0 –68,750 –68,750 Variable manufacturing costs (3 71,250 –131,250* –60,000** years) Income (loss) –$131,250 –$122,500 $8,750 *$43,750 × 3 years **$20,000 × 3 years As indicated by the differential analysis, the total net differential increase in income for the new machine for the entire three years is $8,750. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Falcon Co. to answer the questions that follow. Falcon Co. produces a single product. Its normal selling price is $30 per unit. The variable costs are $19 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1 per unit would be eliminated. 75. If the order is accepted, what would be the impact on net income? a. decrease of $750 b. decrease of $4,500 c. increase of $3,000 d. increase of $1,500 ANSWER: RATIONALE:

c Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) Reject Order Accept Order (Alternative 1) (Alternative 2)

Differential Effect on Income (Alternative 2)

Revenues

$30,000*

$30,000

Costs

–27,000

Income (loss)

–27,000** $ 3,000

$ 3,000

*1,500 units × $20 = $30,000 **1,500 units × ($19 – $1) = $27,000 As indicated by the differential analysis, the differential income from the acceptance of the offer increases by $3,000.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Falcon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 76. Should the special order be accepted? a. The answer cannot be determined from the data given. b. yes c. no d. There would be no difference in accepting or rejecting the special order. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Falcon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 77. Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65.00 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32.00 per unit; direct labor, $10.00 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why? a. buy, $75,000 more in profits b. make, $275,000 increase in profits c. buy, $275,000 more in profits d. make, $350,000 increase in profits ANSWER:

RATIONALE:

Differential Analysis Make Motherboards (Alternative 1) or Buy Motherboards (Alternative 2) Make Motherboards (Alternative 1)

Buy Motherboards (Alternative 2)

$ 0.00 –32.00 –10.00 –16.00

–$ 65.00 0.00 0.00 0.00

Differential Effect on Income (Alternative 2)

Unit costs: Purchase price Direct material Direct labor Variable factory overhead Fixed costs

–$ 65.00 32.00 10.00 16.00

0.00 1.50 –1.50* Income (loss) –$ 59.50 –$ 65.00 –$ 5.50 *$75,000/50,000 motherboards The total increase in the differential income if Mighty Safe Fire Alarm makes 50,000 motherboards is $275,000 ($5.50 × 50,000 motherboards).

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 78. Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and calculate the savings assuming fixed costs are unaffected by the decision. a. $5 savings per unit if manufactured b. $5 savings per unit if purchased c. $10 savings per unit if manufactured d. $15 savings per unit if purchased ANSWER:

a Differential Analysis Make Component (Alternative 1) or Buy Component (Alternative 2)

RATIONALE:

Make Component (Alternative 1)

Buy Component (Alternative 2)

Differential Effect on Income (Alternative 2)

Unit costs: Purchase price $0 –$45 –$45 Variable cost –40 0 40 Fixed cost –15 –15 0 Income (loss) –$55 –$60 –$ 5 As indicated by the differential analysis, Rowan Quinn Company can save $5 per unit from manufacturing the component.

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 79. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation? a. Losses are minimal. b. Variable costs are less than revenues. c. Variable costs are more than revenues. d. Allocated fixed costs are more than revenues. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 80. Which of the following would be considered a sunk cost? a. purchase price of new equipment b. equipment rental for the production area c. net book value of equipment that has no market value d. warehouse lease expense ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 81. All of the following should be considered in a make-or-buy decision except a. cost savings b. quality issues with the supplier c. future growth in the plant and other production opportunities d. whether the supplier will make a profit that would no longer belong to the business ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 82. Which of the following reasons would cause a company to reject an offer to accept business at a special price? a. The additional sales will not conflict with regular sales. b. The additional sales will increase differential income. c. The additional sales will not increase fixed expenses. d. The additional sales will increase fixed expenses. ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 83. A practical approach that is frequently used by managers when setting normal long-run prices is a. the cost-plus approach b. the economic theory approach c. the price graph approach d. price skimming ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 84. Which of the following is not a cost concept commonly used in applying the cost-plus approach to product pricing? a. total cost concept b. product cost concept c. variable cost concept d. fixed cost concept ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 85. When using the product cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. total selling and administrative expenses plus desired profit ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 86. What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the markup? a. total cost concept b. product cost concept c. variable cost concept d. sunk cost concept ANSWER: POINTS: DIFFICULTY:

b 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 87. What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the cost amount to which the markup is added? a. variable cost concept b. total cost concept c. product cost concept d. opportunity cost concept ANSWER: POINTS: DIFFICULTY:

c 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 88. The target cost approach assumes that a. markup is added to total cost b. the selling price is set by the marketplace c. markup is added to variable cost d. markup is added to product cost ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Mallard Corporation to answer the questions that follow. Mallard Corporation uses the product cost concept of product pricing. Below is the cost information for the production and sale of 45,000 units of its sole product. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$82,000 45,000 5.50 7.65 2.25 0.90

89. The dollar amount of the desired profit from the production and sale of the company's product is a. $105,840 b. $225,000 c. $96,000 d. $220,500 ANSWER: RATIONALE:

c Desired Profit = Desired Rate of Return × Total Assets = 12% × $800,000 = $96,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mallard Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 90. The cost per unit for the production of the company's product is a. $13.15 b. $17.22 c. $15.40 d. $15.75 ANSWER: RATIONALE:

b Total Product Cost = Direct Materials + Direct Labor + Factory Overhead = ($5.50 × 45,000 units) + ($7.65 × 45,000 units) + [($2.25 × 45,000 units) + $82,000] = $775,000 Total Product Cost per Unit = Total Product Cost ÷ Units Produced and Sold = $775,000 ÷ 45,000 units = $17.22 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mallard Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 91. The markup percentage on product cost for the company's product is a. 23.4% b. 10.98% c. 26.1% d. 18% ANSWER:

RATIONALE:

Markup Percentage = (Desired Profit1 + Total Selling and Administrative Expenses2)/(Total Product Cost3) Markup Percentage = ($96,000 + $85,500)/($775,000) = 23.4% 1Desired Profit = Desired Rate of Return × Total Assets = 12% × $800,000 =

$96,000 2Total Selling and Administrative Expenses = Variable Selling and Administrative Costs + Fixed Selling and Administrative Costs = ($0.90 × 45,000 units) + $45,000 = $85,500 3Total Product Cost = Direct Materials + Direct Labor + Factory Overhead = ($5.50 × 45,000 units) + ($7.65 × 45,000 units) + [($2.25 × 45,000 units) + $82,000] = $775,000 POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Mallard Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 92. The unit selling price for the company's product is a. $19.35 b. $15.75 c. $22.05 d. $21.25 ANSWER:

RATIONALE:

Unit Selling Price = Product Cost per Unit1 + Markup per Unit2 = $17.22 + $4.03 = $21.25 Total Product Cost = Direct Materials + Direct Labor + Factory Overhead = ($5.50 × 45,000 units) + ($7.65 × 45,000 units) + [($2.25 × 45,000 units) + $82,000] = $775,000 1Product Cost per Unit = Total Product Cost ÷ Units Produced and Sold = $775,000 ÷ 45,000 units = $17.22 2Markup per Unit = Markup Percentage3 × Product Cost per Unit1 = 23.4% × $17.22 = $4.03 3Markup Percentage = (Desired Profit + Total Selling and Administrative Expenses)/(Total Product Cost) Markup Percentage = [(Desired Rate of Return × Total Assets) + (Variable Selling and Administrative Costs + Fixed Selling and Administrative Costs)]/Total Product Cost Markup Percentage = {[(12% × $800,000)] + [($0.90 × 45,000 units) + $45,000]}/$775,000 Markup Percentage = ($96,000 + $85,500)/($775,000) = 23.4%

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 93. What pricing concept considers the price that other providers charge for the same product? a. demand-based concept b. total cost concept c. cost-plus concept d. competition-based concept ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Flyer Company to answer the questions that follow. Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer's management desires a 12.5% profit margin on sales. Its current full cost for the product is $44 per unit. 94. What is the desired profit per unit? a. $6 b. $8 c. $5 d. $4 ANSWER: RATIONALE:

a Desired Profit per Unit = Desired Rate of Return × Selling Price per Unit = 12.5% × $48 = $6 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flyer Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 95. In order to meet the new target cost, how much will it have to cut costs per unit, if any? a. $1 b. $3 c. $2 d. $0 ANSWER: RATIONALE:

c Target Cost = Expected Selling Price – Desired Profit = $48 – (12.5% × $48) = $48 – $6 = $42 To meet the new target cost, the company will have to cut costs by $2 per unit. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flyer Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 96. What is the target cost of the company’s product? a. $44 b. $42 c. $43 d. $40 ANSWER: RATIONALE:

b Target Cost = Expected Selling Price − Desired Profit = $48 – (12.5% × $48) = $48 – $6 = $42 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flyer Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 97. If the company cannot cut costs any lower than they already are, what would the profit margin on sales be to meet the market selling price? a. 9.3% b. 7.3% c. 10.3% d. 8.3% ANSWER: RATIONALE:

d Profit Margin to Meet Market Selling Price = (Expected Selling Price – Current Full Cost)/Expected Selling Price = ($48 – $44)/$48 = 8.3% POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Flyer Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 98. Which equation better describes target costing? a. Selling Price – Desired Profit = Target Costs b. Selling Price + Profit = Target Costs c. Target Variable Costs + Contribution Margin = Selling Price d. Selling Price = Profit – Target Variable Costs ANSWER: POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 99. Using the variable cost concept, determine the markup per unit for 30,000 units using the following data: Variable cost per unit $15 Total fixed costs $90,000 Desired profit $150,000 Round to the nearest dollar. a. $10 b. $15 c. $8 d. $23 ANSWER: RATIONALE:

c Markup per Unit = Markup Percentage × Variable Cost per Unit Markup per Unit = 53%* × $15 = $7.95 or $8 *Markup Percentage = (Desired Profit + Total Fixed Costs)/Total Variable Cost Markup Percentage = ($150,000 + $90,000)/($15 × 30,000 units) = 53% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 100. Swan Company produces a product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit. Determine the markup percentage on product cost. a. 80% b. 46.5% c. 70% d. 110% ANSWER: RATIONALE:

a Markup Percentage = (Desired Profit + Total Selling and Administrative Expenses)/Total Product Cost = ($20 + $8)/($43 – $8) = $28/$35 = 80% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 101. Using the variable cost concept, determine the selling price per unit for 30,000 units using the following data: Variable cost per unit $15 Total fixed costs $90,000 Desired profit $150,000 Round to the nearest dollar. a. $10 b. $15 c. $8 d. $23 ANSWER: RATIONALE:

d Markup Percentage = (Desired Profit + Total Fixed Costs)/Total Variable Cost Markup Percentage = ($150,000 + $90,000)/($15 × 30,000 units) = $240,000/$450,000 = 53% Markup per Unit = Markup Percentage × Variable Cost per Unit = 53% × $15 = $7.95 Selling Price per Unit = Variable Cost per Unit + Markup per Unit = $15.00 + $7.95 = $22.95 or $23 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 102. Target costing is arrived at by taking the a. selling price minus desired profit b. selling price and adding desired profit c. selling price and subtracting the budget standard cost d. budget standard cost and reducing it by 10% ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 103. Peyton Company manufactures Phone X and Phone Y. Peyton can sell all it can make of either. Based on the following data, assuming the number of hours is a constraint, which statement is true? X Y Sales price Variable cost Time needed to process

$48 38

$44 28

5 hours

8 hours

a. X is more profitable than Y. b. Y is more profitable than X. c. Neither X nor Y is profitable. d. X and Y are equally profitable. ANSWER:

RATIONALE: Unit selling price Unit variable cost Unit contribution margin Time needed to process (in hours) Unit contribution margin per processing bottleneck hour

X $48 38 $10 ÷5 $2

Y $44 28 $16 ÷8 $2

Unit contribution margin per processing bottleneck hour is $2 for both X and Y. Both X and Y are equally profitable.

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Widgeon Co. to answer the questions that follow. Widgeon Co. manufactures three products: Bales, Tales, and Wales. Their selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales, 7 hours; and Wales, 1 hour. 104. Which product has the highest contribution margin per machine hour? a. Bales b. Tales c. Wales d. Bales and Tales have the same contribution margin per machine hour. ANSWER: RATIONALE:

c Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour*

Bales $55 20 $35 5 hrs.

Tales $78 50 $28 7 hrs.

Wales $32 15 $17 1 hr.

$17

*Calculated as follows: Bales: $35/5 hrs. = $7 Tales: $28/7 hrs. = $4 Wales: $17/1 hr. = $17 Wales has the highest contribution margin per machine hour. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Widgeon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 105. What is the contribution margin per machine hour for Bales? a. $5 b. $7 c. $35 d. $28 ANSWER: RATIONALE:

Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour * *Calculated as follows:

Bales $55 20 $35 5 hrs. $7

Bales: $35/5 hrs. = $7 POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 106. What is the contribution margin per machine hour for Tales? a. $4 b. $7 c. $28 d. $35 ANSWER: RATIONALE:

Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour* *Calculated as follows:

Tales $78 50 $28 7 hrs. $4

Tales: $28/7 hrs. = $4 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Widgeon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 107. What is the contribution per machine hour for Wales? a. $35 b. $28 c. $17 d. $7 ANSWER: RATIONALE:

Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour* *Calculated as follows:

Wales $32 15 $17 1 hr. $17

Wales: $17/1 hr. = $17 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Widgeon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 108. Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin it can earn per month? a. $49,000 b. $70,000 c. $56,000 d. $34,000 ANSWER: RATIONALE:

Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour*

Bales $55 20 $35 5 hrs.

Tales $78 50 $28 7 hrs.

Wales $32 15 $17 1 hr.

$17

*Calculated as follows: Bales: $35/5 hrs. = $7 Tales: $28/7 hrs. = $4 Wales: $17/1 hr. = $17 Wales has the highest unit contribution margin per processing bottleneck hour of $17 per hour. Thus, Wales is the most profitable product per processing bottleneck hour and is the one that should be emphasized in the market. Maximum contribution margin Widgeon Co. can earn = $17 × 2,000 hours = $34,000 POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 109. Assume that Widgeon produced enough of the product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour? a. $35,000 b. $7,000 c. $4,000 d. $28,000 ANSWER:

RATIONALE: Unit selling price Unit variable cost Unit contribution margin Processing time per unit Unit contribution margin per processing bottleneck hour*

Bales $55 20 $35 5 hrs.

Tales $78 50 $28 7 hrs.

Wales $32 15 $17 1 hr.

$17

*Calculated as follows: Bales: $35/5 hrs. = $7 Tales: $28/7 hrs. = $4 Wales: $17/1 hr. = $17 The additional contribution margin realized by utilizing the remaining 1,000 hours on the production of Bales, which has the second highest contribution margin per hour = $7 × 1,000 hours = $7,000 POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Widgeon Co. LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM Use this information for Miramar Industries to answer the questions that follow. Miramar Industries manufactures two products: A and B. The manufacturing operation involves three overhead activities—production setup, materials handling, and general factory activities. Miramar uses activity-based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Activity

Cost

Activity Base

Production setup

$250,000

Number of setups

Materials handling

150,000

Number of parts

General overhead

80,000

Number of direct labor hours

Each product’s total activity in each of the three areas is as follows:

Number of setups Number of parts Number of direct labor hours

Product A 100 40,000 8,000

Product B 300 20,000 12,000

110. What is the activity rate for production setup? a. $2,500 per setup b. $833 per setup c. $625 per setup d. $400 per setup ANSWER: RATIONALE:

c Activity Rate = Estimated Activity Cost/Estimated Activity-Base Usage Activity Rate for Production Setup = $250,000/(100 setups + 300 setups) = $250,000/400 setups = $625 per setup POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Miramar LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 111. What is the activity rate for materials handling? a. $1.50 per part b. $3.75 per part c. $7.50 per part d. $2.50 per part ANSWER: RATIONALE:

d Activity Rate = Estimated Activity Cost/Estimated Activity-Base Usage Activity Rate for Materials Handling = $150,000/(40,000 parts + 20,000 parts) = $150,000/60,000 parts = $2.50 per part POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Miramar LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 112. What is the activity rate for general overhead? a. $4.00 per direct labor hour b. $60.00 per direct labor hour c. $6.67 per direct labor hour d. $10.00 per direct labor hour ANSWER: RATIONALE:

a Activity Rate = Estimated Activity Cost/Estimated Activity-Base Usage Activity Rate for General Overhead = $80,000/(8,000 direct labor hours + 12,000 direct labor hours) = $80,000/20,000 direct labor hours = $4.00 per direct labor hour POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Miramar LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 113. What is the total overhead allocated to Product A using activity-based costing? a. $194,500 b. $162,500 c. $32,000 d. $224,000 ANSWER: RATIONALE:

a Activity Production setup Materials handling General overhead

Activity-Base Usage 100 setups

Activity Rate

$625.00 per

Activity Cost $ 62,500

setup1 40,000 parts

$2.50 per part 2

100,000

8,000 direct labor hours

$4.00 per direct

32,000

labor hour3

Total $194,500 Activity Rate = Estimated Activity Cost/Estimated Activity-Base Usage 1Activity Rate for Production Setup = $250,000/(100 setups + 300 setups) =

$625.00 per setup 2Activity Rate for Materials Handling = $150,000/(40,000 parts + 20,000 parts) =

$2.50 per part 3Activity Rate for General Overhead = $80,000/(8,000 direct labor hours + 12,000

direct labor hours) = $4.00 per direct labor hour POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Miramar LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 114. What is the overhead allocated to Product B using activity-based costing? a. $135,000 b. $175,000 c. $292,500 d. $285,500 ANSWER: RATIONALE:

d Activity

Activity-Base Usage 300 setups

Activity Rate

Activity Cost $ 187,500

Production $625.00 per × = setup setup1 Materials 20,000 parts 50,000 × = $2.50 per part 2 handling General 12,000 direct 48,000 × $4.00 per direct = overhead labor hours labor hour3 Total $ 285,500 Activity Rate = Estimated Activity Cost/Estimated Activity-Base Usage 1Activity Rate for Production Setup = $250,000/(100 setups + 300 setups) = $625.00 per setup 2Activity Rate for Material Handling = $150,000/(40,000 parts + 20,000 parts) = $2.50 per part 3Activity Rate for General Overhead = $80,000/(8,000 direct labor hours + 12,000 direct labor hours) = $4.00 per direct labor hour POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Miramar LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Swan Company to answer the questions that follow. Swan Company produces a product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit. 115. Determine the markup percentage on total cost. a. 100% b. 110% c. 80% d. 46.5% ANSWER: RATIONALE:

d Markup Percentage = Desired Profit per Unit/Total Cost per Unit = $20/$43 = 46.5% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Swan products LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 3/15/2017 12:01 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 116. Determine the markup percentage on variable cost. a. 100% b. 110% c. 80% d. 46.5% ANSWER: RATIONALE:

b Markup Percentage = (Desired Profit per Unit + Total Fixed Costs and Expenses per Unit*)/(Total Variable Cost per Unit) Markup Percentage = ($20 + $13)/$30 = 110% *Total Fixed Costs per Unit = Total Cost per Unit – Total Variable Cost per Unit = $43 – $30 = $13 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Swan products LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 3/15/2017 12:03 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 84

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Magpie Corporation to answer the questions that follow. Magpie Corporation uses the total cost concept of product pricing. Below is the cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$38,700 7,500 4.60 1.88 1.13 4.50

117. The dollar amount of the desired profit from the production and sale of the company's product is a. $175,000 b. $67,200 c. $73,500 d. $96,000 ANSWER: RATIONALE:

a Desired Profit = Desired Rate of Return × Total Assets = 25% × $700,000 = $175,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Magpie Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 118. The cost per unit for the production and sale of the company's product is a. $12.11 b. $12.88 c. $15.00 d. $13.50 ANSWER: RATIONALE:

b Cost per Unit = Total Cost*/Estimated Units Produced and Sold Cost per Unit = $772,800/60,000 units = $12.88 per unit *Total Cost = $38,700 + $7,500 + [($4.60 + $1.88 + $1.13 + $4.50) × 60,000 units] = $46,200 + ($12.11 × 60,000 units) = $46,200 + $726,600 = $772,800 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Magpie Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 119. The unit selling price for the company's product is a. $15.00 b. $13.82 c. $15.79 d. $14.76 ANSWER:

RATIONALE:

Selling Price per Unit = Cost per Unit1 + Markup per Unit2 = $12.88 + $2.91 = $15.79 1Cost per Unit = Total Cost*/Estimated Units Produced and Sold Cost per Unit = $772,800/60,000 units = $12.88 per unit *Total Cost = $38,700 + $7,500 + [($4.60 + $1.88 + $1.13 + $4.50) × 60,000 units] Total Cost = $46,200 + ($12.11 × 60,000 units) = $46,200 + $726,600 = $772,800 2Markup per Unit = Markup Percentage** × Total Cost per Unit = 22.6% × ($772,800/60,000 units) = $2.91 **Markup Percentage = Desired Profit/Total Cost Markup Percentage = (Desired Rate of Return × Total Assets)/Total Cost Markup Percentage = (25% × $700,000)/$772,800 = 22.6%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Magpie Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 87

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 120. The markup percentage on the total cost of the company's product is a. 21.0% b. 22.6% c. 15.8% d. 24.0% ANSWER:

RATIONALE:

Markup Percentage = Desired Profit*/Total Cost** = $175,000/$772,800 = 22.6% *Desired Profit = Desired Rate of Return × Total Assets = 25% × $700,000 =

$175,000 **Total Cost = $38,700 + $7,500 + [($4.60 + $1.88 + $1.13 + $4.50) × 60,000 units]

Total Cost = $46,200 + ($12.11 × 60,000 units) = $46,200 + $726,600 = $772,800 POINTS: DIFFICULTY:

Page 88

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 121. Contractors who sell to government agencies would be most likely to use which of the following cost concepts in pricing their products? a. variable cost concept b. product cost concept c. total cost concept d. fixed cost concept ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 89

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Dotterel Corporation to answer the questions that follow. Dotterel Corporation uses the variable cost concept of product pricing. Below is the cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% rate of return on invested assets of $350,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit

$105,000 35,000 4.34 5.18 0.98 0.70

122. The variable cost per unit for the production and sale of the company's product is a. $14.00 b. $12.60 c. $9.80 d. $11.20 ANSWER: RATIONALE:

d Variable Cost per Unit = Direct Materials Cost per Unit + Direct Labor Cost per Unit + Variable Factory Overhead Cost per Unit + Variable Selling and Administrative Cost per Unit = $4.34 + $5.18 + $0.98 + $0.70 = $11.20 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dotterel Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 123. The unit selling price for the company's product is a. $16.32 b. $13.44 c. $12.10 d. $13.72 ANSWER: RATIONALE:

a Selling Price per Unit = Variable Cost per Unit + Markup per Unit* = ($4.34 + $5.18 + $0.98 + $0.70) + $5.12 = $11.20 + $5.12 = $16.32 *Markup per Unit = Markup Percentage** × Variable Cost per Unit = 45.71% × $11.20 = $5.12 **Markup Percentage = (Desired Profit1 + Total Fixed Costs and Expenses2)/(Total Variable Cost3) Markup Percentage = ($39,200 + $140,000)/$392,000 = 45.71% 1Desired Profit = Desired Rate of Return × Total Assets = 11.20% × $350,000 = $39,200 2Total Fixed Costs and Expenses = Fixed Factory Overhead Cost + Fixed Selling and Administrative Costs = $105,000 + $35,000 = $140,000 3Total Variable Cost = (Total Variable Cost per Unit) × Number of Units = ($4.34 + $5.18 + $0.98 + $0.70) × 35,000 units = $11.20 × 35,000 units = $392,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dotterel Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 124. The markup percentage for the sale of the company's product is a. 14% b. 5.6% c. 45.71% d. 11.2% ANSWER:

Markup Percentage = ($39,2001 + $140,0002)/$392,0003 = 45.71% 1Desired Profit = Desired Rate of Return × Total Assets = 11.20% × $350,000 = $39,200 2Total Fixed Costs and Expenses = Fixed Factory Overhead Cost + Fixed Selling and Administrative Costs = $105,000 + $35,000 = $140,000 3Total Variable Cost = (Total Variable Cost per Unit) × Number of Units = ($4.34 + $5.18 + $0.98 + $0.70) × 35,000 units = $11.20 × 35,000 units = $392,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dotterel Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM RATIONALE:

Page 92

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 125. The dollar amount of the desired profit from the production and sale of the company's product is a. $89,600 b. $39,200 c. $70,000 d. $84,000 ANSWER: RATIONALE:

b Desired Profit = Desired Rate of Return × Total Assets = 11.20% × $350,000 = $39,200 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Dotterel Corporation LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 126. What pricing concept is used if all costs are considered and a fair markup is added to determine the selling price? a. total cost concept b. demand-based concept c. variable cost concept d. fixed cost concept ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 127. What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the markup? a. product cost concept b. variable cost concept c. sunk cost concept d. total cost concept ANSWER: POINTS: DIFFICULTY:

d 1 Challenging Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 128. When using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. total selling and administrative expenses plus desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. desired profit ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 94

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 129. When using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. total costs plus desired profit b. desired profit c. total selling and administrative expenses plus desired profit d. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit ANSWER: POINTS: DIFFICULTY:

Page 95

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Matching Match each definition that follows with the term (a–e) it defines. a. Opportunity cost b. Sunk cost c. Theory of constraints d. Differential analysis e. Product cost distortion DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCT.WARD.18.25-03 - 25-03 ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 130. Possible result of using an inappropriate overhead allocation method ANSWER: e POINTS: 1 131. Revenue forgone from an alternative use of an asset ANSWER: a POINTS: 1 132. Strategy that focuses on reducing bottlenecks ANSWER: c POINTS: 1 133. Not relevant to future decisions ANSWER: b POINTS: 1 134. Evaluation of how income will change based on an alternative course of action ANSWER: d POINTS: 1

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Match each definition that follows with the term (a–e) it defines. a. Demand-based concept b. Competition-based concept c. Product cost concept d. Target costing e. Production bottleneck DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 135. Constraint ANSWER: e POINTS: 1 136. Combines market-based pricing with a cost-reduction emphasis ANSWER: d POINTS: 1 137. Only includes the costs of manufacturing in product cost per unit ANSWER: c POINTS: 1 138. Sets the price according to competitors ANSWER: b POINTS: 1 139. Sets the price according to demand ANSWER: a POINTS: 1

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Match each definition that follows with the term (a–e) it defines. a. Engineering change order b. Total cost concept c. Variable cost concept d. Normal selling price e. Setup DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCT.WARD.18.25-04 - 25-04 ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 140. A document that initiates a product or process change ANSWER: a POINTS: 1 141. Includes manufacturing costs plus selling and administrative expenses ANSWER: b POINTS: 1 142. Changing tooling when preparing for a new product ANSWER: e POINTS: 1 143. Target selling price to be achieved in the long term ANSWER: d POINTS: 1 144. Variable manufacturing costs plus variable selling and administrative costs are included in cost per unit ANSWER: c POINTS: 1

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Subjective Short Answer 145. The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $550,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks would like to lease half of the building for the next five years at $100,000 each year. Porter would have to continue paying $15,000 of property taxes each year and $2,000 of yearly insurance on the property, according to the proposed lease agreement. Determine the differential income or loss from the lease alternative. ANSWER:

Differential revenue from alternatives: Revenue from lease Revenue from sale Differential loss from sale Differential cost of alternatives: Property tax and insurance Commission expense Differential cost of lease

$875,000 550,000 $(325,000) $ 85,000 27,500

Net differential loss from the sale alternative

(57,500) $(382,500)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 9:46 AM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 146. An employee of Morgan Corporation has found some partially completed units of Model X in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for $600. (a) What should Morgan do? Why? (b) Identify the sunk cost, if any. ANSWER:

(a) Morgan should finish the units because the incremental revenue of $325 ($600 – $275) is greater than the incremental cost of $250. ( b) The $750 in manufacturing costs that have already been incurred is sunk and not relevant. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 147. Lockrite Security Company manufacturers home alarms. Currently, it is manufacturing one of its components at a total cost of $45, which includes fixed costs of $15 per unit. An outside provider of this component has offered to sell Lockrite the component for $40. Provide a differential analysis of the outside purchase proposal. ANSWER:

Differential cost to purchase: Purchase price of the component Differential cost to manufacture: Variable manufacturing costs ($45 – $15) Cost savings from continuing to make the component

$40 30 $10

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 148. Crane Company's Division B recorded sales of $360,000, variable cost of goods sold of $315,000, variable selling expenses of $13,000, and fixed costs of $61,000; creating a loss from operations of $29,000. Determine the differential income or loss from the sales of Division B. Should this division be discontinued? ANSWER: Differential revenue Differential costs: Variable cost of goods sold Variable selling expenses Annual differential income for Division B

$360,000 $315,000 13,000 328,000 $ 32,000

Division B should not be discontinued. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 149. A commercial oven with a book value of $67,000 has an estimated remaining five-year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a five-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the commercial oven. Annual maintenance cost reduction ANSWER: Number of years applicable Total differential decrease in cost Proceeds from sale of equipment Cost of new equipment Net differential decrease in cost from replacing equipment

$ 23,000 × 5 $115,000 8,500$123,500 110,000 $ 13,500

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 150. An unfinished desk is produced for $36.00 and sold for $65.00. A finished desk can be sold for $75.00. The additional processing cost to complete the finished desk is $5.95. Provide a differential analysis for further processing. ANSWER:

Differential revenue from further processing: Revenue per unfinished desk Revenue per finished desk Differential revenue Differential cost per desk: Additional cost for producing Differential income from further processing

$65.00 75.00 $10.00 5.95 $ 4.05

POINTS: DIFFICULTY:

Page 103

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 151. Finch, Inc. has bought a new server and must decide what to do with the old one. The cost of the old server was originally $60,000, and it has been depreciated $45,000. The company has received two offers. One offer was made to purchase the equipment outright for $18,500, less a 5% sales commission. The other offer was to lease the equipment for $7,000 for the next five years, but the company will be required to provide maintenance and insurance totaling $3,000 per year. What offer should Finch, Inc. accept? ANSWER:

Differential revenue: Revenue from lease ($7,000 × 5 years) Revenue from sale Differential revenue from lease Differential costs: Maintenance and insurance ($3000 × 5) Commission expense on sale ($18,500× 5%) Net differential income from the lease alternative

$35,000 18,500 $16,500 $15,000 925 14,075 $2,425

Finch should accept the lease offer. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 152. Diamond Boot Factory normally sells its specialty boots for $375 a pair. An offer to buy 100 boots for $275 per pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250 and special stitching will add another $20 per pair to the cost. Determine the differential income or loss per pair of boots from selling to the organization. ANSWER:

Differential revenue: Revenue per pair of boots Differential costs: Variable manufacturing costs Additional decoration Differential income from accepting special order

$275 $250 20

270 $ 5

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 153. Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years. Should the machine be replaced? ANSWER:

The machine should not be replaced. Supporting calculations: Annual variable costs—present equipment Annual variable costs—new equipment Annual differential decrease in cost Number of years applicable Total differential decrease in cost Proceeds from sale of present equipment

Cost of new equipment Annual net differential increase in cost—new equipment POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 9:47 AM

$4,000 1,500 $2,500 × 5 $12,500 2,000 $14,500 18,000 $(3,500)

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 154. Lark Art Company sells unfinished wooden decorations at a price of $15. The current profit margin is $5 per decoration. The company is considering taking individual orders and customizing them for customers. To finish the decoration, the company would have to pay additional labor of $3 per unit, additional materials costing an average of $4 per unit, and fixed costs would increase by $1,500. If the company estimates that it can sell 600 units for $25 per unit each month, should it start taking the orders? ANSWER: Proposal to Process Decorations Further Differential revenue: Revenue for finished decorations (600 units × $25) $15,000 Revenue for unfinished decorations (600 units × $15) 9,000 Differential revenue $6,000 Differential costs: Direct labor (600 units × $3) $1,800 Direct materials (600 × $4) 2,400 Additional fixed costs 1,500 5,700 Differential income from further processing $ 300 Yes, the company should take additional orders. POINTS: DIFFICULTY:

Page 107

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 155. Hadley Company is considering the disposal of equipment that is no longer needed for operations. The equipment originally cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its remaining useful life for a total of $290,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses that would be incurred by Hadley on the machine during the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission. Prepare a differential analysis report, dated June 15, on whether the equipment should be leased or sold. ANSWER: Differential Analysis Proposal to Lease or Sell Equipment June 15 Net income from leasing: Revenue from lease $290,000 Costs associated with the lease 75,800 Net income from lease Net income from selling: Sales price $230,000 Commission expense on sale 23,000 Net income from selling Net advantage of lease alternative POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

$214,200

207,000 $ 7,200

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 156. Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net loss for Product J of $12,250. This net loss resulted from sales of $260,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expense is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J. ANSWER: Differential Analysis Proposal to Discontinue Product J February 8 Continue DiscontinueDifferential Product J Product J Effect on Income $260,000

0 –$260,000

Variable CGS

–$130,550

$130,550

Fixed CGS

–55,950

Variable op.exp.

–51,450

51,450

Fixed op.exp.

34,300

–34,300

Revenues Costs:

Total costs

–$272,250

–$90,250 $182,000

Income (loss)

–$ 12,250

–$ 78,000

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 157. Snipe Company has been purchasing a component, Part Q, for $19.20 per unit. Snipe is currently operating at 70% of capacity, and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q is estimated as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total

$11.50 4.50 1.12 3.15 $20.27

Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q. ANSWER: Differential Analysis Proposal to Manufacture Part Q March 12 Make Buy Differential Effect on Income Unit costs: Purchase price Direct materials Direct labor Variable factory overhead Fixed factory overhead Income (loss) The company should make the component.

$ 0 –$19.20 –11.50 0 –4.50 0 –1.12 0 –3.15 –3.15 –$20.27 –$22.35

–$19.20 11.50 4.50 1.12 0 –$ 2.08

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 158. Due to Medicare reimbursement cuts, Loving Home Care is considering shutting down its Certified Nursing Assistant (CNA) Division. Fixed costs will have to be transferred to the Nursing Division if the CNA Division is discontinued. Based on the following income statement make a recommendation to the president regarding this decision. Loving Home Care Condensed Income Statement For the Year Ended December 31 Nursing Revenues Variable costs Fixed costs Net income from operations

$3,500,000 2,000,000 400,000 $1,100,000

CNA

Total

$1,000,000 700,000 400,000 $ (100,000)

$4,500,000 2,700,000 800,000 $1,000,000

ANSWER: Proposal to Discontinue CNA December 31

Differential revenue from CNA Differential variable costs from CNA Annual differential income from CNA revenue

$1,000,000 700,000 $ 300,000

Keep the CNA Division, since operating income would decrease by $300,000 if the division were discontinued. POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 9:51 AM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 159. MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3 per unit at normal plant capacity), and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company. Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price. ANSWER: Proposal to Sell to Exporter April 21 Differential revenue from accepting offer: Revenue from sale of 7,500 additional units at $9.90 Differential cost of accepting offer: Variable costs and expenses of 7,500 additional units at $8.25 Differential income from accepting offer POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-01 - 25-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 9:53 AM

$74,250

61,875 $12,375

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 160. Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts for $12.00 each. The company has enough excess capacity to make this order. A breakdown of costs is as follows: Direct materials Direct labor Variable costs Fixed costs Total cost per unit

$2.00 0.50 1.50 _2.50 $6.50

Should Piper Rose Boutique accept the special order made by the college? ANSWER:

Yes, Piper Rose Boutique should accept the special order, determined as follows: Differential revenue from accepting offer (4,000 × $6.00)

$24,000

Differential variable costs of additional units (4,000 × $4.00)

16,000

Differential income from accepting offer

$ 8,000

POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 161. Airflow Company sells a product in a competitive marketplace. Market analysis indicates that the product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% rate of return on invested assets of $1,400,000. Airflow anticipates selling 50,000 units. The current full cost per unit for the product is $25.00 per unit. (a) What is the amount of profit per unit? (b) What is the target cost per unit if Airflow meets the market dictated price and management’s desired profit? ANSWER:

(a) $28.00 – $25.00 = $3.00

(b) ($1,400,000 × 20%)/50,000 = $5.60 per unit $28.00 – $5.60 = $22.40 per unit POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 10:00 AM 162. Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total

$2.50 4.25 1.25 0.50 $8.50

Fixed costs: Factory overhead Selling and administrative expenses

$25,000 17,000

Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500. (a) Determine the amount of desired profit from the production and sale of Product K. (b) Determine the total manufacturing costs and the cost amount per unit for the production of 25,000 units of Product K. (c) Determine the markup percentage for Product K. (d) Determine the selling price of Product K. Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Round the markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places. ANSWER:

(a) $32,125 ($642,500 × 5%) (b) Total manufacturing costs: Variable ($8.00 × 25,000 units) Fixed factory overhead Total Cost amount per unit: $225,000/25,000 units

$200,000 25,000 $225,000 $ 9.00

(c) Markup Percentage = Desired Profit + Total Selling and Administrative Expenses Total Manufacturing Costs Markup Percentage = $32,125 + $17,000 + ($0.50 × 25,000 units) $225,000 Markup Percentage = $32,125 + $17,000 + $12,500 $225,000 Markup Percentage = $ 61,625 = 27.4% $225,000 (d) Cost amount per unit Markup ($9.00 × 27.4%) Selling price

$ 9.00 2.47 $11.47

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 163. Mallory Company produces and sells Product X at a total cost of $35 per unit, of which $28 is product cost and $7 is selling and administrative expenses. In addition, the total cost of $35 is made up of $24 variable cost and $11 fixed cost. The desired profit is $8 per unit. Determine the markup percentage on product cost. ANSWER: POINTS: DIFFICULTY:

Markup percentage: ($8 + $7)/$28 = 53.6% 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 164. Goshawks Co. produces an automotive product and incurs total manufacturing costs of $2,600,000 in the production of 80,000 units. The company desires to earn a profit equal to a 12% rate of return on assets of $960,000. Total selling and administrative expenses are $105,000. (a) Calculate the markup percentage, using the product cost concept. (b) Compute the selling price per unit of the automotive product. Round the markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places.

ANSWER:

(a) Markup Percentage = Desired Profit + Total Selling and Administrative Expenses Total Manufacturing Costs Markup Percentage = ($960,000 × 12%) + $105,000 $2,600,000 Markup Percentage =

$220,200 $2,600,000

Markup Percentage = 8.5% (b) Manufacturing cost amount per unit ($2,600,000/80,000 units) Markup ($32.50 × 8.5%) Selling price

$32.50 2.76 $35.26

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 10:01 AM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 165. Sierra Company produces its product at a total cost of $89 per unit. Of this amount, $14 per unit is selling and administrative costs. The total variable cost is $58 per unit and the desired profit is $28 per unit. Determine the markup percentage using the (a) total cost, (b) product cost, and (c) variable cost concepts. ANSWER:

(a) Total Cost = $28/$89 = 31.5% (b) Product Cost = ($28 + $14)/$75 = 56%

(c) Variable Cost = ($28 + $31)/$58 = 101.7% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-02 - 25-02 ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 10:02 AM 166. Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available: Iced Tea $0.90 0.30 $0.60

Sales price per unit Variable cost per unit Contribution margin per unit

Soda $0.60 0.15 $0.45

Lemonade $0.50 0.10 $0.40

Sensational is experiencing a bottleneck in one of its processes that affects each product as follows:

Bottleneck process hours per unit (a) (b)

Iced Tea 3

Soda 3

Lemonade 4

Using a theory of constraints (TOC) approach, rank the products in terms of profitability. What price for lemonade would equate its profitability (contribution margin per bottleneck hour) to that of soda?

ANSWER:

(a) Contribution Margin per Unit = CM per Bottleneck Hour Bottleneck Hours per Unit Rank (1) Iced Tea:

$0.60 = $0.20 CM per bottleneck hour 3 Page 118

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing (2) Soda:

$0.45 = $0.15 CM per bottleneck hour 3

(3) Lemonade:

$0.40 = $0.10 CM per bottleneck hour 4

(b) Contribution Margin per Bottleneck Hour of Soda

Revised Price of Variable Cost – Lemonade (L) of Lemonade Bottleneck Hours per Unit of Lemonade

$0.15

L – $0.10 4

$0.60

L – $0.10

$0.60 + $0.10

$0.70

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.30 - Contribution Margin ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 167. Ptarmigan Company produces two products. Product A has a contribution margin of $20 and requires 4 machine hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product assuming the machine hours are the constraint.

ANSWER: Contribution margin per unit Machine hours Contribution margin per bottleneck hour

Product Product A B $20 $18 4 3 $ 5 $ 6

Product B is the most profitable. POINTS: DIFFICULTY:

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 168. The Eastwood Cake Factory sells chocolate cakes, birthday decorated cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is more profitable. Even though the company may have to limit the orders that it takes, Eastwood is concerned about customer service and satisfaction.

Sales price Variable cost per cake Hours needed to bake, frost, and decorate

Chocolate Cake $20.00 $5.00

Birthday Cake $45.00 $12.00

Specialty Cake $60.00 $20.00

1 hour

2.5 hours

2 hours

(a) Calculate the contribution margin per hour per cake. (b) Determine which cakes the company should try to sell more of first, second, and then last. ANSWER:

(a) Chocolate $15.00, Birthday $13.20, Specialty $20.00 (b) Specialty, Chocolate, Birthday

Sales price Variable cost per cake Contribution margin per cake Hours needed to bake, frost, and decorate Contribution margin per hour per cake

Chocolate Birthday Specialty Cake Cake Cake $20.00 $45.00 $60.00 5.00 12.00 20.00 $15.00

$33.00

$40.00

1 hour

2.5 hours

2 hours

$15.00

$13.20

$20.00

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 169. Olsen Company produces two products. Product A has a contribution margin of $30 and requires 10 machine hours. Product B has a contribution margin of $24 and requires 4 machine hours. Determine the most profitable product assuming the machine hours are the constraint. Product Product A B $30 $24 10 4 $3 $6

ANSWER: Contribution margin per unit Machine hours Contribution margin per bottleneck hour Product B is the most profitable. POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-03 - 25-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 170. Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $600,000; assembly, $240,000; setup, $200,000; and materials handling, $160,000. Turtle manufactures two products, Boogie Boards and Surf Boards. The activity-base usage quantities for each product by each activity are as follows:

Boogie Boards Surf Boards

Fabrication

Assembly

Setup

Materials Handling

10,000 dlh

30,000 dlh

60 setups

100 moves

30,000 40,000 dlh

10,000 440 40,000 dlh 500 setups

700 800 moves

Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activity-based costing. ANSWER:

(a) Fabrication: $600,000/40,000 dlh = $15 per dlh Assembly: $240,000/40,000 dlh = $6 per dlh Setup: $200,000/500 setups = $400 per setup Materials handling: $160,000/800 moves = $200 per move (b) Boogie Board Surf Board ActivityActivityBase Activity Activity Base Activity Activity Activity Usage Rate Cost Usage Rate Cost 10,000 30,000

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Fabrication Assembly Setup Materials handling Total Budgeted units Factory overhead per unit

dlh $15/dlh $150,000 dlh $15/dlh $450,000 30,000 10,000 dlh $6/dlh 180,000 dlh $6/dlh 60,000 60 440 setups $400/setup 24,000 setups $400/setup 176,000 100 700 moves $200/move 20,000 moves $200/move 140,000 $374,000 $826,000 ÷ 10,000

÷ 10,000

$37.40

$82.60

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-04 - 25-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 171. Canine Company has total estimated factory overhead for the year of $2,400,000, divided into four activities: fabrication, $1,200,000; assembly, $480,000; setup, $400,000; and materials handling, $320,000. Canine manufactures two products, Standard Crates and Deluxe Crates. The activity-base usage quantities for each product by each activity are as follows:

Standard Deluxe

Materials Fabrication Assembly Setup Handling 20,000 dlh 60,000 dlh 120 setups 200 moves 60,000 20,000 880 1,400 80,000 dlh 80,000 dlh 1,000 setups 1,600 moves

Each product is budgeted for 20,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activity-based costing. ANSWER:

(a) Fabrication: $1,200,000/80,000 dlh = $15 per dlh Assembly: $480,000/80,000 dlh = $6 per dlh Setup: $400,000/1,000 setups = $400 per setup Materials handling: $320,000/1,600 moves = $200 per move (b)

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Standard

Deluxe

Activity

ActivityBase Usage

Fabrication

20,000 dlh

$15/dlh $300,000 60,000dlh

$15/dlh

$900,000

Assembly

60,000 dlh

$6/dlh

120,000

120 $400/setup setups

48,000 880setups $400/setup

352,000

200 $200/move moves

40,000

1,400 moves $200/move

280,000

Setup Materials handling Total

Activity Rate

Activity Cost

ActivityBase Usage

Activity Rate

Activity Cost

360,000 20,000dlh

$748,000

$1,652,000

Budgeted units

÷20,000

÷ 20,000

Factory overhead per unit

$37.40

$82.60

POINTS: DIFFICULTY:

Page 124

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 172. Yakking Co. manufactures mobile cellular equipment and develops a price for the product by using the variable cost concept. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units while fixed costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% rate of return on assets. (a) Compute a markup percentage based on variable cost. (b) Determine a selling price. Round the markup percentage to one decimal place, and other intermediate calculations and final answer to two decimal places. ANSWER:

(a) Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs Markup Percentage = (10% × $4,725,000) + $50,000 $1,900,000 Markup Percentage =

$522,500 $1,900,000

Markup Percentage = 27.5% (b) Cost amount per unit Markup ($19 × 27.5%) Selling price

$19.00 5.23 $24.23

POINTS: DIFFICULTY:

1 Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM

Page 125

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 173. Jamison Company produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired profit is $5 per unit. Determine the markup percentage on total cost. ANSWER: POINTS: DIFFICULTY:

Markup percentage: $5/$25 = 20% 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:19 PM 174. Using the variable cost concept, determine the selling price for 30,000 units using the following data: variable cost per unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000. Round the markup percentage to one decimal place and markup to nearest dollar. ANSWER:

Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs Markup $150,000 + $90,000 Percentage = $450,000 Markup = Selling price =

= 53.3%

$15.00 × 53.3% = $8.00 $15.00 + $8.00 = $23.00

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.11 - Strategic Planning ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/16/2017 10:05 AM 175. Jay Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and Copyright Cengage Learning. Powered by Cognero.

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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing expenses of producing and selling 38,400 units of Product E are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses

$ 4.70 2.50 1.90 2.60 $11.70 $80,000 14,000

Jay desires a profit equal to a 14% rate of return on invested assets of $640,000. (a) Determine the amount of desired profit from the production and sale of Product E. (b) Determine the total costs and the cost amount per unit for the production and sale of 38,400 units of Product E. (c) Determine the markup percentage for Product E. (d) Determine the selling price of Product E. ANSWER:

(a) $89,600 ($640,000 × 14%) (b) Total costs: Variable ($11.70 × 38,400 units) Fixed ($80,000 + $14,000) Total Cost amount per unit: $543,280/38,400 units (c)

$449,280 94,000 $543,280 $14.15

Markup Percentage

Desired Profit Total Costs

Markup Percentage

$89,600 $543,280

Markup Percentage

16.5%

(d) Cost amount per unit Markup ($14.15 × 16.5%) Selling price

$14.15 2.33 $16.48

POINTS: DIFFICULTY:

Page 127

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing

DATE CREATED: DATE MODIFIED:

ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic 1/16/2017 4:23 PM 3/15/2017 4:19 PM

176. Moon Company uses the variable cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 75,000 units of Product T are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses

$7.00 3.50 1.50 3.00 $15.00 $45,000 20,000

Moon desires a profit equal to an18% rate of return on invested assets of $1,440,000. (a) Determine the amount of desired profit from the production and sale of Product T. (b) Determine the total variable costs for the production and sale of 75,000 units of Product T. (c) Determine the markup percentage for Product T. (d) Determine the unit selling price of Product T. Round the markup percentage to one decimal place and other intermediate calculations and final answer to two decimal places. ANSWER:

(a) $259,200 ($1,440,000 × 18%) (b) Total variable costs: $15.00 × 75,000 units = $1,125,000 (c) Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs Markup Percentage = $259,200 + $45,000 + $20,000 $1,125,000 Markup Percentage =

$324,200 $1,125,000

Markup Percentage = 28.8% (d) Cost amount per unit Markup ($15.00 × 28.8%) Selling price POINTS: DIFFICULTY: QUESTION TYPE:

$15.00 4.32 $19.32

1 Challenging Bloom's: Applying Subjective Short Answer

Page 128

Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.25-APP - 25-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.27 - Managerial Accounting Features/Costs ACCT.ACBSP.APC.33 - Incremental Analysis ACCT.IMA.14 - Decision Analysis BUSPROG: Analytic DATE CREATED: 1/16/2017 4:23 PM DATE MODIFIED: 3/15/2017 4:20 PM 177. Falcon Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Falcon desires a profit equal to a 12% rate of return on assets, $785,000 of assets are devoted to producing Product B, and 100,000 units are expected to be produced and sold. (a) Compute the markup percentage, using the total cost concept. (b) Compute the selling price of Product B. Round intermediate calculations and final answer to two decimal places. ANSWER:

(a)

Markup Percentage = Desired Profit Total Costs Markup Percentage =

$785,000 × 12% ($15.00 × 100,000) + $70,000

Markup Percentage =

$94,200 $1,570,000

Markup Percentage = 6% (b)

Cost amount per unit Markup ($15.70 × 6%) Selling price of Product B

$15.70 0.94 $16.64

POINTS: DIFFICULTY:

Page 129

Chapter 26 - Capital Investment Analysis True / False 1. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 2. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 1

Chapter 26 - Capital Investment Analysis 3. Only managers are encouraged to submit capital investment proposals because they know the processes and are able to match investments with long-term goals. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 4. Methods that ignore present value in capital investment analysis include the cash payback method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 2

Chapter 26 - Capital Investment Analysis 5. Methods that ignore present value in capital investment analysis include the average rate of return method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 6. The cash payback method of capital investment analysis is one of the methods referred to as a present value method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 3

Chapter 26 - Capital Investment Analysis 7. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 8. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 4

Chapter 26 - Capital Investment Analysis 9. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present value methods. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:21 AM 10. Methods that ignore present value in capital investment analysis include the net present value method. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

Page 5

Chapter 26 - Capital Investment Analysis 11. Methods that ignore present value in capital investment analysis include the internal rate of return method. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

Page 6

Chapter 26 - Capital Investment Analysis 13. Average rate of return equals estimated average annual income divided by average investment. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 14. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 7

Chapter 26 - Capital Investment Analysis 15. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 16. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

Page 8

Chapter 26 - Capital Investment Analysis 17. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 30%. a. True b. False ANSWER: RATIONALE:

True Average Investment = (Initial Cost + Residual Value)/2 = $400,000/2 = $200,000 Estimated Average Annual Income = Total Net Income/Useful Life = $300,000/5 = $60,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $60,000/$200,000 = 30%

POINTS: DIFFICULTY:

Page 9

Chapter 26 - Capital Investment Analysis 18. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $300,000 for the five years. The expected average rate of return is 37.5%. a. True b. False ANSWER: RATIONALE:

False Average Investment = (Initial Cost + Residual Value)/2 = $400,000/2 = $200,000 Estimated Average Annual Income = Total Net Income/Useful Life = $300,000/5 = $60,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $60,000/$200,000 = 30%

POINTS: DIFFICULTY:

Page 10

Chapter 26 - Capital Investment Analysis 19. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 50%. a. True b. False ANSWER: RATIONALE:

False Average Investment = (Initial Cost + Residual Value)/2 = $400,000/2 = $200,000 Estimated Average Annual Income = Total Net Income/Useful Life = $200,000/5 = $40,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $40,000/$200,000 = 20%

POINTS: DIFFICULTY:

Page 11

Chapter 26 - Capital Investment Analysis 20. The anticipated purchase of a fixed asset for $400,000, with a useful life of five years and no residual value, is expected to yield total net income of $200,000 for the five years. The expected average rate of return on investment is 25%. a. True b. False ANSWER: RATIONALE:

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:26 AM 21. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 12

Chapter 26 - Capital Investment Analysis 22. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 23. If a proposed expenditure of $70,000 for a fixed asset with a four-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years. a. True b. False ANSWER: RATIONALE:

False Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $70,000/$32,000 = 2.2 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:27 AM

Page 13

Chapter 26 - Capital Investment Analysis 24. If a proposed expenditure of $80,000 for a fixed asset with a four-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is four years. a. True b. False ANSWER: RATIONALE:

False Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $80,000/$32,000 = 2.5 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:29 AM 25. The cash payback method can be used only when net cash inflows are the same for each period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 14

Chapter 26 - Capital Investment Analysis 26. For Years 1–5, a proposed expenditure of $250,000 for a fixed asset with a five-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is three years. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Cash Payback Period = $90,000 + $85,000 + $75,000 = $250,000 = 3 years 1 Bloom's: Applying Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:31 AM 27. The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

Page 15

Chapter 26 - Capital Investment Analysis 28. The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 29. The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period. a. True b. False ANSWER: POINTS: DIFFICULTY:

Page 16

Chapter 26 - Capital Investment Analysis 30. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years. a. True b. False ANSWER: RATIONALE:

False Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $21,000/$3,500 = 6 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 31. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is six years. a. True b. False ANSWER: RATIONALE:

True Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $21,000/$3,500 = 6 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:27 PM

Page 17

Chapter 26 - Capital Investment Analysis 32. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5). The average income from operations over the five-year life is $20,400. The payback period is 3.5 years. a. True b. False ANSWER: RATIONALE: POINTS: DIFFICULTY:

True Payback Period = $36,000 + $30,000 + $18,000 + ($6,000/$12,000) = 3.5 years 1 Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:35 AM 33. For Years 1–5, a proposed expenditure of $500,000 for a fixed asset with a five-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is five years. a. True b. False ANSWER: RATIONALE:

False Total Cash Inflows = $90,000 + $85,000 + $75,000 + $75,000 + $75,000 = $400,000 The total cash inflows are less than the proposed expenditure; therefore, there is no cash payback period.

POINTS: DIFFICULTY:

Page 18

Chapter 26 - Capital Investment Analysis 34. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 16.7%. a. True b. False ANSWER: RATIONALE:

True Average Investment = (Initial Cost + Residual Value)/2 = $24,000/2 = $12,000 Estimated Average Annual Income = Total Income/Useful Life = $12,000/6 = $2,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $2,000/$12,000 = 16.7% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:39 AM

Page 19

Chapter 26 - Capital Investment Analysis 35. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is 12 years. a. True b. False ANSWER: RATIONALE:

False Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $24,000/$6,000 = 4 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:41 AM 36. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years. a. True b. False ANSWER: RATIONALE:

False Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $48,000/($16,000 – $8,000) = 6 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

Page 20

Chapter 26 - Capital Investment Analysis 37. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is four years. a. True b. False ANSWER: RATIONALE:

True Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $24,000/$6,000 = 4 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:43 AM 38. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is six years. a. True b. False ANSWER: RATIONALE:

True Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $48,000/($16,000 – $8,000) = 6 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:44 AM

Page 21

Chapter 26 - Capital Investment Analysis 39. A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 50%. a. True b. False ANSWER: RATIONALE:

False Average Investment = (Initial Cost + Residual Value)/2 = $24,000/2 = $12,000 Estimated Average Annual Income = Total Income/Useful Life = $12,000/6 = $2,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $2,000/$12,000 = 16.7% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:45 AM 40. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 41. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 42. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 43. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 44. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 45. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 46. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 47. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 48. A present value index can be used to rank competing capital investment proposals when the net present value method is used. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 49. The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 50. Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Understanding QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 51. In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Moderate Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 52. In calculating the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 53. A series of equal cash flows at fixed intervals is termed an annuity. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 54. A qualitative characteristic that may impact capital investment analysis is the impact of investment proposals on product quality. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:46 AM

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Chapter 26 - Capital Investment Analysis 55. A qualitative characteristic that may impact capital investment analysis is manufacturing flexibility. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 57. A qualitative characteristic that may impact capital investment analysis is manufacturing productivity. a. True b. False ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 59. The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis. a. True b. False ANSWER: POINTS: DIFFICULTY:

False 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-05 - 26-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 60. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing. a. True b. False ANSWER: POINTS: DIFFICULTY:

True 1 Easy Bloom's: Remembering QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-05 - 26-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis Multiple Choice 61. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called a. absorption cost analysis b. variable cost analysis c. capital investment analysis d. cost-volume-profit analysis ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 62. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of a. sales mix analysis b. variable cost analysis c. capital investment analysis d. variable cost analysis ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 63. The methods of evaluating capital investment proposals can be separated into two general groups—present value methods and a. past value methods b. straight-line methods c. reducing value methods d. methods that ignore present value ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 64. Which of the following are two methods of analyzing capital investment proposals that both ignore present value? a. internal rate of return and average rate of return b. net present value and average rate of return c. internal rate of return and net present value d. average rate of return and cash payback method ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 65. Which of the following is a method of analyzing capital investment proposals that ignores present value? a. internal rate of return b. net present value c. discounted cash flow d. average rate of return ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 66. Which of the following are present value methods of analyzing capital investment proposals? a. internal rate of return and average rate of return b. average rate of return and net present value c. net present value and internal rate of return d. net present value and payback ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 67. Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return? a. average rate of return b. accounting rate of return c. cash payback period d. internal rate of return ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 68. Which of the following is a present value method of analyzing capital investment proposals? a. average rate of return b. cash payback method c. accounting rate of return d. net present value ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 69. The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is the a. cash payback method b. net present value method c. internal rate of return method d. average rate of return method ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:48 AM 70. The primary advantages of the average rate of return method are its ease of computation and the fact that a. it is especially useful to managers whose primary concern is liquidity b. there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short term c. it emphasizes the amount of income earned over the life of the proposal d. rankings of proposals are necessary ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:49 AM

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Chapter 26 - Capital Investment Analysis 71. The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the four years is a. 45% b. 22.5% c. 11.3% d. 5.5% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $800,000/2 = $400,000 Estimated Average Annual Income = Total Net Income/Useful Life = $360,000/4 = $90,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $90,000/$400,000 = 22.5% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:50 AM

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Chapter 26 - Capital Investment Analysis 72. The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the four years is a. $30,000 b. $21,600 c. $5,400 d. $60,000 ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Average Investment = (Initial Cost + Residual Value)/2 = $120,000/2 = $60,000 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:51 AM 73. The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $25,300, is a. $12,650 b. $25,300 c. $6,325 d. $45,000 ANSWER: RATIONALE:

c Estimated Average Annual Income = Expected Total Income/Useful Life = $25,300/4 = $6,325 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:54 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis 74. An anticipated purchase of equipment for $490,000 with a useful life of eight years and no residual value is expected to yield the following annual net incomes and net cash flows: Year 1 2 3 4 5 6 7 8

Net Income $60,000 50,000 50,000 40,000 40,000 40,000 40,000 40,000

Net Cash Flow $110,000 100,000 100,000 90,000 90,000 90,000 90,000 90,000

What is the cash payback period? a. 5 years b. 4 years c. 6 years d. 3 years ANSWER: RATIONALE:

a Cash Payback Period = $110,000 + $100,000 + $100,000 + $90,000 + $90,000 = $490,000 = 5 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:55 AM

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Chapter 26 - Capital Investment Analysis 75. Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $150,000, and annual operating income of $87,500. What is the estimated cash payback period for the machine? a. 3.5 years b. 4 years c. 4.5 years d. 5 years ANSWER: RATIONALE:

c Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $675,000/$150,000 = 4.5 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 10:56 AM

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Chapter 26 - Capital Investment Analysis 76. The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $12,000,000 over the 20 years is a. 20% b. 10% c. 40% d. 5% ANSWER: RATIONALE:

a Average Investment = (Initial Cost + Residual Value)/2 = $6,000,000/2 = $3,000,000 Estimated Average Annual Income = Total Net Income/Useful Life = $12,000,000/20 = $600,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $600,000/$3,000,000 = 20% POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis Use this information for Nebraska Corporation to answer the questions that follow. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability:

Year 1 2 3 4 5

Income from Operations $100,000 40,000 40,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 120,000

77. The cash payback period for this investment is a. 5 years b. 4 years c. 2 years d. 3 years ANSWER: RATIONALE:

b Cash Payback Period = $180,000 + $120,000 + $100,000 + $90,000 = $490,000 = 4 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Nebraska Corporation LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 78. The average rate of return for this investment is a. 18% b. 16% c. 58% d. 10% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $490,000/2 = $245,000 Estimated Average Annual Income = ($100,000 + $40,000 + $40,000 + $10,000 + $10,000)/5 = $40,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $40,000/$245,000 = 16%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Nebraska Corporation LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis Use this information for Wyoming Corporation to answer the questions that follow. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $18,750 18,750 18,750 18,750 18,750

Net Cash Flow $93,750 93,750 93,750 93,750 93,750

79. The average rate of return for this investment is a. 5% b. 10% c. 25% d. 15% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $375,000/2 = $187,500 Estimated Average Annual Income = $18,750 Average Rate of Return = Estimated Average Annual Income/Average Investment = $18,750/$187,500 = 10%

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Wyoming management LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 80. The cash payback period for this investment is a. 4 years b. 5 years c. 20 years d. 3 years ANSWER: RATIONALE:

a Cash Payback Period = $93,750 + $93,750 + $93,750 + $93,750 = $375,000 = 4 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Wyoming management LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 81. The present value index for this investment is a. 1.00 b. 0.95 c. 1.25 d. 1.05 ANSWER: RATIONALE:

d Present Value = Amount to Be Received Annually for 5 Years × Present Value of an Annuity of $1 to Be Received for 5 Years Present Value of a $93,750 5-Year Annuity at 6% = $93,750 × 4.212 = $394,875 Present Value Index = Total Present Value of Net Cash Flow/Amount to Be Invested = $394,875/$375,000 = 1.05

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Wyoming management LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 82. The net present value for this investment is a. $(118,145) b. $118,145 c. $19,875 d. $(19,875) ANSWER: RATIONALE:

c Present Value = Amount to Be Received Annually for 5 Years × Present Value of an Annui $1 to Be Received for 5 Years Present value of a $93,750 5-year annuity at 6% ($93,750 × 4.212) $394,875 Less: Total investment

375,000

Net present value of investment

$ 19,875

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Wyoming management LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 83. The expected average rate of return for a proposed investment of $650,000 in a fixed asset, with a useful life of four years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the four years, is a. 13.9% b. 36.9% c. 18.5% d. 9.25% ANSWER: RATIONALE:

c Average Investment = (Initial Cost + Residual Value)/2 = $650,000/2 = $325,000 Estimated Average Annual Income = Total Income/Useful Life = $240,000/4 = $60,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $60,000/$325,000 = 18.5%

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 11:10 AM 84. Which of the following is not an advantage of the average rate of return method? a. easy to use b. takes into consideration the time value of money c. includes the amount of income earned over the entire life of the proposal d. emphasizes accounting income ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis 85. Which of the following is an advantage of the cash payback method? a. easy to use b. takes into consideration the time value of money c. includes the cash flow over the entire life of the proposal d. emphasizes accounting income ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 86. An anticipated purchase of equipment for $520,000, with a useful life of eight years and no residual value, is expected to yield the following annual net income and net cash flow: Year 1 2 3 4 5 6 7 8

Net Income $60,000 50,000 50,000 40,000 40,000 40,000 40,000 40,000

Net Cash Flow $120,000 110,000 110,000 100,000 80,000 80,000 60,000 60,000

What is the cash payback period? a. 5 years b. 4 years c. 6 years d. 3 years ANSWER: RATIONALE:

a Cash Payback Period = $120,000 + $110,000 + $110,000 + $100,000 + $80,000 = $520,000 = 5 years POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 11:13 AM

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Chapter 26 - Capital Investment Analysis 87. Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a useful life of six years, a negligible residual value, an annual net cash flow of $120,000, and annual operating income of $83,721. What is the estimated cash payback period for the machine? a. 3.5 years b. 5 years c. 5.1 years d. 4 years ANSWER: RATIONALE:

a Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $420,000/$120,000 = 3.5 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 11:14 AM

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Chapter 26 - Capital Investment Analysis 88. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total net income of $10,560,000 over the 20 years is a. 24% b. 22% c. 45% d. 10% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $4,800,000/2 = $2,400,000 Estimated Average Annual Income = Total Net Income/Useful Life = $10,560,000/20 = $528,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $528,000/$2,400,000 = 22%

POINTS: DIFFICULTY:

Page 53

Chapter 26 - Capital Investment Analysis 89. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this situation:

Year 1 2 3 4 5

Income from Operations $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The cash payback period for this investment is a. 5 years b. 4 years c. 2 years d. 3 years ANSWER: RATIONALE: POINTS: DIFFICULTY:

d Cash Payback Period = $180,000 + $120,000 + $100,000 = $400,000 = 3 years 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 90. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $100,000 60,000 30,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The average rate of return for this investment is a. 18% b. 21% c. 53% d. 10% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $400,000/2 =$200,000 Estimated Average Annual Income = ($100,000 + $60,000 + $30,000 + $10,000 + $10,000)/5 = $42,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $42,000/$200,000 = 21%

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 91. The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $20,000 20,000 20,000 20,000 20,000

Net Cash Flow $95,000 95,000 95,000 95,000 95,000

The cash payback period for this investment is a. 4 years b. 5 years c. 19 years d. 3.3 years ANSWER: RATIONALE:

a Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $380,000/$95,000 = 4 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 11:18 AM

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Chapter 26 - Capital Investment Analysis 92. Which of the following is true of the cash payback period? a. the longer the payback, the longer the estimated life of the asset b. the longer the payback, the sooner the cash spent on the investment is recovered c. the shorter the payback, the less likely the possibility of obsolescence d. All of these choices ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 93. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best cash payback. Which machine has the best payback period? Machine A Machine B Annual cash flow $ 40,000 $ 50,000 Initial cost 300,000 250,000 a. Machine A b. Machine C c. Machine B d. They all three have the same cash payback period. ANSWER: RATIONALE:

Machine C $ 75,000 500,000

c Cash Payback Period = Initial Cost/Annual Net Cash Inflow Cash payback period: Machine A: $300,000/$40,000 = 7.5 years Machine B: $250,000/$50,000 = 5 years Machine C: $500,000/$75,000 = 6.7 years Machine B has the best cash payback period.

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 12:55 PM

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Chapter 26 - Capital Investment Analysis 94. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best average rate of return. Which machine has the best average rate of return? Machine A

Machine B

Machine C

Estimated average annual income

$ 40,000

$ 50,000

$ 75,000

Average investment

300,000

250,000

500,000

a. Machine B b. Machine C c. Machines A and B d. Machine A ANSWER: RATIONALE:

a Average Rate of Return = Estimated Average Annual Income/Average Investment Average rate of return: Machine A: $40,000/$300,000 = 13.3% Machine B: $50,000/$250,000 = 20% Machine C: $75,000/$500,000 = 15% Machine B has the best average rate of return.

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis Use this information for River Corporation to answer the questions that follow. The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for five years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $20,000 20,000 20,000 20,000 20,000

Net Cash Flow $95,000 95,000 95,000 95,000 95,000

95. The cash payback period for this investment is a. 4 years b. 5 years c. 20 years d. 3 years ANSWER: RATIONALE:

a Cash Payback Period = Initial Cost/Annual Net Cash Inflow = $380,000/$95,000 = 4 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: River Corporation LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 96. The average rate of return for this investment is a. 5% b. 10.5% c. 25% d. 15% ANSWER: RATIONALE:

b Average Investment = (Initial Cost + Residual Value)/2 = $380,000/2 = $190,000 Estimated Average Annual Income = $20,000 Average Rate of Return = Estimated Average Annual Income/Average Investment = $20,000/$190,000 = 10.5%

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: River Corporation LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 97. The net present value for this investment is a. $20,140 b. $(20,140) c. $19,875 d. $(19,875) ANSWER: RATIONALE:

a Present Value = Amount to Be Received Annually for 5 Years × Present Value of an Annuity of $1 to Be Received for 5 Years Present value of a $95,000 5-year annuity at 6% ($95,000 × 4.212)

$400,140

Less: Total investment Net present value of investment

380,000 $20,140

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: River Corporation LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 98. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows? a. internal rate of return method b. cash payback method c. net present value method d. average rate of return method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 99. When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n) a. average rate of return index b. consumer price index c. present value index d. price-level index ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 100. A series of equal cash flows at fixed intervals is termed a(n) a. present value index b. price-level index c. net cash flow d. annuity ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 101. Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received three years hence with earnings at the rate of 6% a year is Year 1 2 3 4 a. $12,600 b. $11,880 c. $13,350 d. $11,265 ANSWER: RATIONALE:

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a Present Value = Amount to Be Received 3 Years from Now × Present Value of $1 to Be Received 3 Years from Now = $15,000 × 0.840 = $12,600

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:05 PM

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Chapter 26 - Capital Investment Analysis 102. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis? a. price-level index b. future value index c. rate of investment index d. present value index ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 103. The rate of earnings is 6% and the cash to be received in four years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest, is Year 1 2 3 4

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a. $13,660 b. $12,720 c. $15,840 d. $16,800 ANSWER: RATIONALE:

c Present Value = Amount to Be Received 4 Years from Now × Present Value of $1 to Be Received 4 Years from Now = $20,000 × 0.792 = $15,840

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 104. The present value index is computed using which of the following formulas? a. Amount to Be Invested/Average Rate of Return b. Total Present Value of Net Cash Flow/Amount to Be Invested c. Total Present Value of Net Cash Flow/Average Rate of Return d. Amount to Be Invested/Total Present Value of Net Cash Flow ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:08 PM 105. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? a. The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. b. The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. c. The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. d. The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. ANSWER: POINTS: DIFFICULTY:

a 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:09 PM

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Chapter 26 - Capital Investment Analysis 106. The formula for calculating the present value factor for an annuity of $1 is a. Amount to Be Invested/Annual Average Net Income b. Annual Net Cash Flow/Amount to Be Invested c. Annual Average Net Income/Amount to Be Invested d. Amount to Be Invested/Equal Annual Net Cash Flows ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:10 PM 107. Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? a. net present value b. average rate of return c. internal rate of return d. cash payback ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 108. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

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Chapter 26 - Capital Investment Analysis

Year 1 2 3 4 5

Income from Operations $100,000 40,000 40,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 120,000

The net present value for this investment is a. $36,400 b. $55,200 c. $(16,170) d. $(126,800) ANSWER:

c Present Value

RATIONALE: Year

Net Cash

of $1 at 10%

Present Value of Flow Net Cash Flow

0.909

$180,000

0.826

120,000

0.751

100,000

0.683

90,000

0.621

120,000

Total

$610,000

$163,620 99,120 75,100 61,470 74,520 $473,830

Less: Amount to be invested Net present value

490,000 $(16,170)

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis

109. The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's d present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, resp foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The present value index for this investment is a. 0.88 b. 1.45 c. 1.14 d. 0.70 ANSWER:

RATIONALE: Year 1 2 3 4 5

Present Value of $1 at 10% 0.909 0.826 0.751 0.683

90,000

0.621

90,000

Net Cash Flow

Present Value of Net Cash Flow

$180,000

$163,620

120,000

99,120

100,000

75,100 61,470 55,890

Total $580,000 $455,200 Present Value Index = Total Present Value of Net Cash Flow/Amount to Be Invested = $455,200/$400,000 = 1.14 POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 110. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for seven years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is a. 10% b. 6% c. 12% d. 8% ANSWER: RATIONALE:

d Present Value Factor for an Annuity of $1 = Amount to Be Invested/Equal Annual Net Cash Flows = $208,240/$40,000 = 5.206 Using the given present value factors for an annuity of $1 for seven years, the factor 5.206 is related to 8%. Thus, the internal rate of return for this investment is 8%.

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:13 PM

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Chapter 26 - Capital Investment Analysis 111. By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money a. has an international rate of exchange b. is the language of business c. is the measure of assets, liabilities, and stockholders' equity on financial statements d. has a time value ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis Use these present value tables to answer the questions that follow. Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

112. Using the tables above, what would be the present value of $25,000 (rounded to the nearest dollar) to be received four years from today, assuming an earnings rate of 10%? a. $19,800 b. $17,075 c. $79,250 d. $15,525 ANSWER: RATIONALE:

b Present Value = Amount to Be Received 4 Years from Now × Present Value of $1 to Be Received 4 Years from Now = $25,000 × 0.683 = $17,075

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Present value of $1 LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:15 PM

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Chapter 26 - Capital Investment Analysis 113. Using the tables above, what would be the present value of $30,000 to be received three years from today, assuming an earnings rate of 6%? a. $25,200 b. $26,700 c. $23,760 d. $80,190 ANSWER: RATIONALE:

a Present Value = Amount to Be Received 3 Years from Now × Present Value of $1 to Be Received 3 Years from Now = $30,000 × 0.840 = $25,200 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Present value of $1 LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:16 PM

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Chapter 26 - Capital Investment Analysis 114. Using the tables above, what is the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next four years, assuming an earnings rate of 12%? a. $10,815 b. $7,206 c. $9,111 d. $1,908 ANSWER: RATIONALE:

c Present Value = Amount to Be Received Annually for 4 Years × Present Value of an Annuity of $1 to Be Received for 4 Years = $3,000 × 3.037 = $9,111 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Present value of $1 LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:18 PM

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Chapter 26 - Capital Investment Analysis

115. Using the tables above, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the nex present value of the investment, assuming an earnings rate of 10%? a. $23,500 b. $16,050 c. $25,360 d. $1,860 ANSWER: RATIONALE:

d Present Value = Amount to Be Received Annually for 4 Years × Present Value of an Annuity of $1 to Be Received for 4 Years Present value of an $8,000 4-year annuity at 10% ($8,000 × 3.170) $25,360 Less: Total investment

23,500

Net present value of investment

$ 1,860

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Present value of $1 LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:19 PM

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Chapter 26 - Capital Investment Analysis 116. Using the tables above, what would be the internal rate of return of an investment of $227,460 that would generate an annual cash inflow of $60,000 for the next five years? a. 6% b. 10% c. 12% d. cannot be determined from the data given ANSWER: RATIONALE:

b Present Value Factor for an Annuity of $1 = Amount to Be Invested/Equal Annual Net Cash Flows = $227,460/$60,000 = 3.791 Using the given present value factors for an annuity of $1 for five years, the factor 3.791 is related to 10%. Thus, the internal rate of return for this investment is 10%.

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 117. Using the tables above, what would be the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next five years? a. 6% b. 10% c. 12% d. 14% ANSWER: RATIONALE:

a Present Value Factor for an Annuity of $1 = Amount to Be Invested/Equal Annual Net Cash Flows = $210,600/$50,000 = 4.212 Using the given present value factors for an annuity of $1 for five years, the factor 4.212 is related to 6%. Thus, the internal rate of return for this investment is 6%.

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 118. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for four years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is a. 9% b. 10% c. 12% d. 3% ANSWER: RATIONALE:

c Present Value Factor for an Annuity of $1 = Amount to Be Invested/Equal Annual Net Cash Flows = $109,332/$36,000 = 3.037 Using the given present value factors for an annuity of $1 for four years, the factor 3.037 is related to 12%. Thus, the internal rate of return for this investment is 12%.

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 119. Using the following partial table of present value of $1 at compound interest, determine the present value of $50,000 to be received three years hence with earnings at the rate of 12% a year: Year 1 2 3 4

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a. $37,550 b. $31,800 c. $35,600 d. $39,850 ANSWER: RATIONALE:

c Present Value = Amount to Be Received 3 Years from Now × Present Value of $1 to Be Received 3 Years from Now = $50,000 × 0.712 = $35,600 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:25 PM

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Chapter 26 - Capital Investment Analysis 120. The rate of earnings is 12% and the cash to be received in two years is $10,000. Determine the present value amount, using the following partial table of present value of $1 at compound interest: Year 1 2 3 4

6% 0.943 0.890 0.840 0.792

10% 0.909 0.826 0.751 0.683

12% 0.893 0.797 0.712 0.636

a. $8,930 b. $7,120 c. $7,970 d. $8,260 ANSWER: RATIONALE:

c Present Value = Amount to Be Received 2 Years from Now × Present Value of $1 to Be Received 2 Years from Now = $10,000 × 0.797 = $7,970 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:27 PM

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Chapter 26 - Capital Investment Analysis 121. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The net present value for this investment is a. $16,400 b. $25,200 c. $(99,600) d. $(126,800) ANSWER:

b Present Value

RATIONALE: Year

of $1 at 10%

1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 Total Less: Amount to be invested Net present value

Net Cash

Present Value of Net Cash Flow

Flow $180,000 120,000 100,000 90,000 90,000 $580,000

$163,620 99,120 75,100 61,470 55,890 $455,200 430,000 $ 25,200

POINTS: DIFFICULTY:

122. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desi Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis

present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, resp information, use the following data in determining the acceptability of this investment:

Year 1 2 3 4 5

Income from Operations $100,000 40,000 20,000 10,000 10,000

Net Cash Flow $180,000 120,000 100,000 90,000 90,000

The present value index for this investment is a. 1.08 b. 1.45 c. 1.14 d. 0.70 ANSWER:

a Present Value

RATIONALE: Year 1 2 3 4 5

of $1 at 10% 0.909 0.826 0.751 0.683 0.621

Net

Present Value of

Cash Flow

Net Cash Flow

$180,000

$163,620

120,000

99,120

100,000

75,100

90,000

61,470

90,000

55,890

Total $580,000 $455,200 Present Value Index = Total Present Value of Net Cash Flow/Amount to Be Invested = $455,200/$420,000 = 1.08 POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis Use these present value tables to answer the questions that follow. Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

123. Using the tables above, what would be the present value of $15,000 to be received at the end of each of the next two years, assuming an earnings rate of 6%? a. $27,495 b. $26,040 c. $30,000 d. $25,350 ANSWER: RATIONALE:

a Present Value = Amount to Be Received Annually for 2 Years × Present Value of an Annuity of $1 to Be Received for 2 Years = $15,000 × 1.833 = $27,495 POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Compound interest table LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:30 PM

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Chapter 26 - Capital Investment Analysis 124. Using the tables above, what would be the present value of $8,000 to be received one year from today, assuming an earnings rate of 12%? a. $7,544 b. $7,120 c. $7,272 d. $7,144 ANSWER: RATIONALE:

d Present Value = Amount to Be Received 1 Year from Now × Present Value of $1 to Be Received 1 Year from Now = $8,000 × 0.893 = $7,144

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Compound interest table LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 1:31 PM

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Chapter 26 - Capital Investment Analysis 125. Using the tables above, what is the present value of $6,000 to be received at the end of each of the next four years, assuming an earnings rate of 10%? a. $20,790 b. $19,020 c. $14,412 d. $25,272 ANSWER: RATIONALE:

b Present Value = Amount to Be Received Annually for 4 Years × Present Value of an Annuity of $1 to Be Received for 4 Years = $6,000 × 3.170 = $19,020

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 126. Using the tables above, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next four years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%? a. $20,352 b. $3,969 c. $22,190 d. $21,259 ANSWER: RATIONALE:

d Present Value = Amount to Be Received Annually for 4 Years × Present Value of an Annuity of $1 to Be Received for 4 Years = $7,000 × 3.037 = $21,259

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 127. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which of the proposals (if any) meets or exceeds the company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years. The accountant has identified the following data:

Present value of future cash flows computed using 10% rate of return Amount of initial investment Which of the investments are acceptable? a. Machines A and C b. Machines B and C c. Machine B only d. Machine A only ANSWER:

Machine A

Machine B

Machine C

$305,000 300,000

$295,000 300,000

$300,000 300,000

a Machine A Machine B Machine C

RATIONALE:

Present value of future cash flows computed using 10% rate of return $305,000 $295,000 $300,000 Less: Amount of initial investment 300,000 300,000 300,000 Net present value $ 5,000 ($ 5,000) $ 0 Using the net present value method, both Machine A and Machine C are acceptable investments. POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 128. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?

Annual net cash flows Average investment

Machine A $ 50,000 250,000

Machine B $ 40,000 300,000

Machine C $ 75,000 500,000

a. Machine B only b. Machine C only c. Machines A and B d. Machine A only ANSWER: RATIONALE:

a Present Value Factor for an Annuity of $1 = Amount to Be Invested/Equal Annual Net Cash Flows PV factor: Machine A: $250,000/$50,000 = 5 Machine B:$300,000/$40,000 = 7.5 Machine C: $500,000/$75,000 = 6.7 Machine B has the highest present value factor; therefore, its internal rate of return is the highest.

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 129. T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. yes, because net present value is +$9,000 b. yes, because net present value is –$9,000 c. no, because net present value is +$9,000 d. no, because net present value is –$9,000 ANSWER:

RATIONALE:

Present value of future cash flows Less: Amount of initial investment

$141,000 150,000

Net present value

($ 9,000)

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 130. Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should they invest in this project? a. yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows b. no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows c. no, because net present value is +$17,000 d. yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 131. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the present value calculations was 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The internal rate of return on the project is less than 12%. c. The internal rate of return on the project is more than 12%. d. The internal rate of return on the project is equal to 12%. ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis 132. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to calculate the present value of the future cash flows is less than 12%. c. The desired rate of return used to calculate the present value of the future cash flows is more than 12%. d. The desired rate of return used to calculate the present value of the future cash flows is equal to 12%. ANSWER: POINTS: DIFFICULTY:

b 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 133. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to calculate the present value of the future cash flows is less than 12%. c. The desired rate of return used to calculate the present value of the future cash flows is more than 12%. d. The desired rate of return used to calculate the present value of the future cash flows is equal to 12%. ANSWER: POINTS: DIFFICULTY:

d 1 Moderate Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 134. All of the following qualitative considerations may impact capital investment analysis except a. manufacturing productivity b. manufacturing sunk cost c. manufacturing flexibility d. market opportunities ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 3:55 PM 135. All of the following qualitative considerations may impact capital investment analysis except a. time value of money b. employee morale c. the impact on product quality d. manufacturing flexibility ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 3:57 PM

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Chapter 26 - Capital Investment Analysis 136. Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life of nine years. What is one widely used method to make the net present values of the proposals comparable? a. Ignore the fact that Proposal F has a useful life of six years and treat it as if it has a useful life of nine years. b. Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of Year 6. c. Ignore the useful lives of six and nine years and find an average (7 1/2 years). d. Ignore the useful lives of six and nine years and compute the average rate of return. ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Applying QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:01 PM 137. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects? a. deductions for individuals b. depreciation deduction c. minimum tax provision d. charitable contributions ANSWER: POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 138. Which of the following is not considered a complicating factor in capital investment decisions? a. income tax b. lease versus purchasing options c. equal proposal lives d. qualitative factors ANSWER: POINTS: DIFFICULTY:

c 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 139. Periods in time that experience increasing price levels are known as periods of a. inflation b. recession c. depression d. deflation ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 140. Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment? a. evaluating further assets that are dissimilar in nature or have different useful lives b. using only quantitative measures to evaluate asset purchases c. analyzing lease versus purchase option d. considering income tax ramifications ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 141. All of the following are factors that may complicate capital investment analysis except a. possible leasing alternatives b. changes in price levels c. sunk costs d. federal income tax ramifications ANSWER: POINTS: DIFFICULTY:

c 1 Moderate Bloom's: Understanding QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 142. The process by which management allocates available investment funds among competing investment proposals is called a. investment capital b. investment rationing c. cost-volume-profit analysis d. capital rationing ANSWER: POINTS: DIFFICULTY:

d 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-05 - 26-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 143. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum standards. Which of the following evaluation methods are often used? a. cash payback method and average rate of return method b. average rate of return method and net present value method c. net present value method and cash payback method d. internal rate of return method and net present value method ANSWER: POINTS: DIFFICULTY:

a 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-05 - 26-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:45 PM

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Chapter 26 - Capital Investment Analysis 144. In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of a. present value b. nonfinancial factors c. maximum cost d. net cash flow ANSWER: POINTS: DIFFICULTY:

b 1 Easy Bloom's: Remembering QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-05 - 26-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:46 PM

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Chapter 26 - Capital Investment Analysis Matching Match each of the methods that follow with the correct category (a or b). a. Method that does not use present value b. Method that uses present value DIFFICULTY:

Moderate Bloom's: Understanding QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:47 PM 145. Cash payback method ANSWER: a POINTS: 1 146. Internal rate of return method ANSWER: b POINTS: 1 147. Average rate of return method ANSWER: a POINTS: 1 148. Net present value method ANSWER: b POINTS: 1

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Chapter 26 - Capital Investment Analysis Match each definition that follows with the term (a–e) it defines. a. Capital investment analysis b. Time value of money concept c. Net present value method d. Average rate of return e. Cash payback period DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 149. Recognizes that a dollar today is worth more than a dollar tomorrow ANSWER: b POINTS: 1 150. Often referred to as the discounted cash flow method ANSWER: c POINTS: 1 151. Also referred to as capital budgeting ANSWER: a POINTS: 1 152. Average income as a percentage of average investment ANSWER: d POINTS: 1 153. Can be determined by initial cost divided by annual net cash inflow of an investment ANSWER: e POINTS: 1 Match each definition that follows with the term (a–f) it defines. a. Capital rationing b. Annuity c. Capital investment analysis Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis d. Internal rate of return method e. Payback period f. Accounting rate of return DIFFICULTY:

Easy Bloom's: Remembering QUESTION TYPE: Matching HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:08 PM 154. A measure of the average income as a percent of the average investment ANSWER: f POINTS: 1 155. The process by which management allocates funds among various capital investment proposals ANSWER: a POINTS: 1 156. A stream of equal cash flow amounts ANSWER: b POINTS: 1 157. A formal means of analyzing long-range investment decisions ANSWER: c POINTS: 1 158. Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based on its expected net cash flows ANSWER: d POINTS: 1 159. The length of time it will take to recover through cash inflows the dollars of a capital outlay ANSWER: e POINTS: 1

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Chapter 26 - Capital Investment Analysis Subjective Short Answer 160. What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky? ANSWER:

Capital investment analysis is the process of analyzing alternative long-term investments and deciding which assets to acquire and/or sell. Capital investment analysis decisions are difficult because they are usually based on predictions about an uncertain future. These decisions involve large sums of money committed for long periods of time and may be irreversible. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-01 - 26-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM 161. Determine the average rate of return for a project that is estimated to yield total income of $600,000 over four years, cost $840,000, and has an $80,000 residual value. Round percentage to one decimal place. Estimated average annual income: $150,000 ($600,000/4 years) Average investment: $460,000 [($840,000 +$80,000)/2] Average rate of return: 32.6% ($150,000/$460,000) POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:20 PM ANSWER:

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Chapter 26 - Capital Investment Analysis 162. Proposals L and K each cost $600,000, have six-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$250,000 200,000 100,000 50,000 100,000 20,000 $720,000

Determine the cash payback period for each proposal. Round answers to two decimal places. ANSWER:

Proposal L: $600,000/$170,000 = 3.53 years

Proposal K: $250,000 + $200,000 + $100,000 + $50,000 = $600,000 = 4 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:22 PM

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Chapter 26 - Capital Investment Analysis 163. Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co. ANSWER:

Estimated Average Annual Income Average Investment

= Average Rate of Return

X ($1,050,000 + $0)/2

= 0.18

X $525,000

= 0.18

= $94,500

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:29 PM 164. Determine the average rate of return for a project that is estimated to yield total income of $250,000 over four years, cost $480,000, and has a $20,000 residual value. ANSWER:

Estimated average annual income: Average investment: Average rate of return:

$62,500 ($250,000/4 years) $250,000 [($480,000 + $20,000)/2] 25% ($62,500/$250,000)

POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:31 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis 165. An eight-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income. ANSWER:

Estimated Average Annual Income = X Average Investment ($400,000 + $0)/2

= 5%

X = 0.05 × $200,000 X = $10,000 POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 166. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 75,000 100,000 109,000 36,000 $320,000

Net Cash Flow $285,000 290,000 190,000 125,000 $890,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the average rate of return on investment, including the effect of depreciation on the investment. ANSWER:

$320,000/4 = $80,000 = 19.8% ($810,000 + $0)/2 $405,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:38 PM

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Chapter 26 - Capital Investment Analysis 167. Proposals M and N each cost $550,000, have six-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

$250,000 200,000 150,000 75,000 50,000 25,000

Determine the cash payback period for each proposal. ANSWER:

Proposal M: $550,000/$125,000 = 4.4 years

Proposal N: $250,000 + $200,000 + 2/3($150,000) = $550,000 = 2 2/3 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:40 PM

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Chapter 26 - Capital Investment Analysis 168. A six-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated annual net income. ANSWER:

Estimated Average Annual Income = X Average Investment ($350,000 + $0)/2

= 12%

X = 0.12 × $175,000 X = $21,000 POINTS: DIFFICULTY:

1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:42 PM 169. A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period. ANSWER: POINTS: DIFFICULTY:

7.5 years ($600,000/$80,000) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 170. Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Co. ANSWER:

Est. Average Annual Income Average Investment

= Average Rate of Return

X ($700,000 + $0)/2

= 0.15

X $350,000

= 0.15

= $52,500

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 171. Proposals A and B each cost $600,000 and have five-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows: Year 1 Year 2 Year 3 Year 4 Year 5

$150,000 140,000 110,000 150,000 50,000 $600,000

Determine the cash payback period for each proposal. Round answers to two decimal places. ANSWER:

Proposal A: $600,000/$159,000 = 3.77 years

Proposal B: ($150,000 + $140,000 + $110,000 + $150,000 + $50,000) = $600,000 = 5 years POINTS: 1 DIFFICULTY: Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:52 PM 172. A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period. ANSWER: POINTS: DIFFICULTY:

4 years ($240,000/$60,000) 1 Easy Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/2/2017 10:31 AM

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Chapter 26 - Capital Investment Analysis 173. Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method. ANSWER:

The four capital investment models discussed in the chapter are the cash payback method, the average rate of return method, the net present value method, and the internal rate of return method. Following are strengths and weaknesses of each: The cash payback method is easy to understand and is based on cash flows, which are of primary concern to many businesses. However, it ignores profitability and the time value of money. The average rate of return method measures profitability, but it ignores the time value of money.

The net present value method and the internal rate of return method are both based on cash flows, profitability, and the time value of money. The disadvantages of these two methods are that they have more complex computations and they assume the cash flows can be reinvested at the minimum desired rate of return. POINTS: 1 DIFFICULTY: Moderate Bloom's: Remembering QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.37 - Payback/ARR Methods ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 4:57 PM

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Chapter 26 - Capital Investment Analysis 174. Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 90,000 80,000 40,000 30,000 $240,000

Net Cash Flow $210,000 200,000 160,000 150,000 $720,000

The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for Years 1 through 4 is 0.870, 0.756, 0.658, and 0.572, respectively. Determine (a) the average rate of return on investment, using straight-line depreciation, and (b) the net present value. ANSWER:

(a) $240,000/4 = $60,000 = 25% ($480,000 + $0)/2 $240,000 (b)

Present Value Net Present Value of Year of $1 at 15% Cash Flow Net Cash Flow 1 0.870 $210,000 $182,700 2 0.756 200,000 151,200 3 0.658 160,000 105,280 4 0.572 150,000 85,800 Total $720,000 $524,980 Amount to be invested 480,000 Net present value $ 44,980 POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:00 PM

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Chapter 26 - Capital Investment Analysis 175. BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 75,000 102,000 109,500 36,000 $322,500

Net Cash Flow $285,000 290,000 190,000 125,000 $890,000

The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the net present value. ANSWER:

(a) $322,500/4 = $80,625 = 20% ($806,250 + $0)/2 $403,125 (b) Present Value of $1 at 12% 0.893 0.797 0.712 0.636

Present Value of Net Cash Flow Net Cash Flow $285,000 $ 254,505 290,000 231,130 190,000 135,280 125,000 79,500 $890,000 $ 700,415 806,250 $(105,835)

Year 1 2 3 4 Total Amount to be invested Net present value POINTS: 1 DIFFICULTY: Challenging Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-02 - 26-02 ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:48 PM

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Chapter 26 - Capital Investment Analysis 176. A project has estimated annual cash flows of $95,000 for four years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

ANSWER:

(a) $41,150 [($95,000 × 3.170) – $260,000] (b) 1.16 ($301,150/$260,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:06 PM

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Chapter 26 - Capital Investment Analysis 177. A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

ANSWER:

(a) $(26,170) [($90,000 × 2.487) – $250,000] (b) 0.90 ($223,830/$250,000) POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:07 PM

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Chapter 26 - Capital Investment Analysis 178. A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for seven years. Determine the internal rate of return for this project, using the following present value of an annuity table. Year 1 2 3 4 5 6 7 8 9 10

6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360

10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145

12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650

ANSWER:

12% [($273,840/$60,000) = 4.564, the present value of an annuity factor for seven periods at 12%] POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:08 PM

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Chapter 26 - Capital Investment Analysis 179. A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for eight years. Determine the internal rate of return for this project, using the following present value of an annuity table. Year 1 2 3 4 5 6 7 8 9 10

6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360

10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145

12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650

ANSWER:

12% [($248,400/$50,000) = 4.968, the present value of an annuity factor for eight periods at 12%] POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:09 PM

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Chapter 26 - Capital Investment Analysis 180. What is the present value of $8,000 to be received at the end of six years if the required rate of return is 15%? Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

15% 0.870 0.756 0.658 0.572 0.497

Year 6 7 8 9 10

15% 0.432 0.376 0.327 0.284 0.247

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

15% 0.870 1.626 2.283 2.855 3.353

Year 6 7 8 9 10

15% 3.785 4.160 4.487 4.772 5.019

ANSWER: POINTS: DIFFICULTY:

$8,000 × 0.432 = $3,456 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:49 PM

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Chapter 26 - Capital Investment Analysis 181. Norton Company is considering a closed-loop geothermal heat pump to replace its existing heating system. The project will require an initial investment of $750,000 and will return $200,000 each year for five years. (a) If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? (b) Based on this analysis, should Norton Company proceed with the project? Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

9% 0.917 0.842 0.772 0.708 0.650

Year 6 7 8 9 10

9% 0.596 0.547 0.502 0.460 0.422

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

9% 0.917 1.759 2.531 3.240 3.890

Year 6 7 8 9 10

9% 4.486 5.033 5.535 5.995 6.418

ANSWER: (a) ($200,000 × 3.890) – $750,000 = $28,000 (b) Yes, since the net present value is greater than zero, Norton Company should proceed with the project. POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:13 PM

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Chapter 26 - Capital Investment Analysis 182. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment’s internal rate of return? Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

15% 0.870 0.756 0.658 0.572 0.497

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

15% 0.870 1.626 2.283 2.855 3.353

ANSWER: POINTS: DIFFICULTY:

$185,575/$65,000 = 2.855 at 4 years = 15% 1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:17 PM

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Chapter 26 - Capital Investment Analysis 183. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of four years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4

Net Income $ 75,000 100,000 109,000 36,000 $320,000

Net Cash Flow $280,000 300,000 200,000 120,000 $900,000

Year

Present Value of $1 at 12%

0.893

$280,000

$ 250,040

0.797

300,000

239,100

0.712

200,000

142,400

0.636

120,000

76,320

$900,000

$ 707,860

Total

Present Value of Net Cash Flow Net Cash Flow

Amount to be invested Net present value

810,000 $(102,140)

POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:18 PM

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Chapter 26 - Capital Investment Analysis 184. A $550,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4

Net Cash Flow $300,000 280,000 208,000 180,000

The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value. ANSWER:

Year 1

Present Value of $1 at 12% 0.893

0.797

280,000

223,160

0.712

208,000

148,096

0.636

180,000

114,480

$968,000

$753,636

Total

Net Present Value of Cash Flow Net Cash Flow $300,000 $267,900

Amount to be invested

550,000

Net present value

$203,636

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 185. Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4

Net Cash Flow $97,500 80,000 60,000 40,000

The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for Years 1 through 4 is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Round interim answers to the nearest dollar. ANSWER: Present Value Year of $1 at 10% 1 0.909 2 0.826 3 0.751 4 0.683 Total Amount to be invested Net present value

Net Cash Present Value of Flow Net Cash Flows $ 97,500 $ 88,628 80,000 66,080 60,000 45,060 40,000 27,320 $277,500 $227,088 227,500 $ ( 412)

POINTS: DIFFICULTY:

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Chapter 26 - Capital Investment Analysis 186. The net present value has been computed for Proposals P and Q. Relevant data are as follows:

Amount to be invested Total present value of net cash flow

Proposal P $245,000 296,500

Proposal Q $460,000 425,000

Determine the present value index for each proposal. Round answers to two decimal places. ANSWER:

Proposal P: $296,500 = 1.21 $245,000

Proposal Q: $425,000 = 0.92 $460,000 POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:25 PM

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Chapter 26 - Capital Investment Analysis 187. A $400,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4

Net Cash Flow $200,000 150,000 90,000 80,000

Net Present Value of Cash Flow Net Cash Flow $200,000 $178,600 150,000 119,550 90,000 64,080 80,000 50,880 $520,000 $413,110 400,000 $ 13,110

Year 1 2 3 4 Total Amount to be invested Net present value POINTS: 1 DIFFICULTY: Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:27 PM

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Chapter 26 - Capital Investment Analysis 188. Briefly describe the time value of money. Why is the time value of money important in capital investment analysis? ANSWER:

The time value of money means that a dollar today is worth more than a dollar in the future. Since capital investment analysis decisions are often based on cash flows, which will be received in the future, managers often use a process called discounting in order to measure future cash flows in the value of today’s dollar. POINTS: 1 DIFFICULTY: Easy Bloom's: Understanding QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-03 - 26-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.26 - Management Functions ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:32 PM

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Chapter 26 - Capital Investment Analysis 189. Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $13,500 over a four-year life. Project A could be sold at the end of four years for $25,000. (a) Using the table below, determine the net present value of Project A over a fouryear life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5 ANSWER:

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

(a) Present value of a $15,000 4-year annuity at 12% Present value of $25,000, four years at 12% Total present value of Project A Total cost of Project A Net present value of Project A

$45,555* 15,900** $61,455 50,000 $11,455

*[$15,000 × 3.037 (Present value of an annuity of $1)] **[$25,000 × 0.636 (Present value of $1)] (b) Project B’s present value of $13,500 is greater than the net present value of Project A of $11,455. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/9/2017 5:36 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis 190. Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for seven years. Project B has a calculated net present value of $5,500 over a five-year life. Project A could be sold at the end of five years for a price of $30,000. (a) Using the table below, determine the net present value of Project A over a five-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Below is a table for the present value of $1 at compound interest. Year 1 2 3 4 5

6% 0.943 0.890 0.840 0.792 0.747

10% 0.909 0.826 0.751 0.683 0.621

12% 0.893 0.797 0.712 0.636 0.567

Below is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5 ANSWER:

6% 0.943 1.833 2.673 3.465 4.212

10% 0.909 1.736 2.487 3.170 3.791

12% 0.893 1.690 2.402 3.037 3.605

(a) Present value of a $15,000 5-year annuity at 12% Present value of $30,000, five years at 12% Total present value of Project A Total cost of Project A Net present value of Project A

$54,075* 17,010** $71,085 65,000 $ 6,085

*[$15,000 × 3.605 (Present value of an annuity of $1)] **[$30,000 × 0.567 (Present value of $1)] (b) Project A’s net present value of $6,085 is greater than the net present value of Project B, $5,500. POINTS: DIFFICULTY:

1 Moderate Bloom's: Applying QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False LEARNING OBJECTIVES: ACCT.WARD.18.26-04 - 26-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.38 - NPV/IRR Methods ACCT.IMA.15 - Investment Decisions BUSPROG: Analytic DATE CREATED: 1/16/2017 4:24 PM DATE MODIFIED: 3/15/2017 3:50 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26 - Capital Investment Analysis

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